Fitch Catches Flak For Oddly-Timed U.S. Credit Downgrade

Fitch Ratings’ downgrade of the U.S. government’s credit rating is being met with pushback from officials and well known economists, while others said it highlighted the need for the government to reduce spending deficits.

On Tuesday evening, Fitch became the second major credit agency ever to downgrade the credit rating of the U.S. The agency notched U.S. creditworthiness to AA+ from the highest-possible AAA rating it previously held.

The agency cited the growing national debt and the pattern of repeated standoffs over the debt ceiling in recent years, in which Republican lawmakers have threatened not to pay bills that Congress previously authorized in order to win concessions from Democratic presidents. 

The Fitch downgrade came months after the most recent debt ceiling standoff was resolved by a deal between Republican and Democratic leaders. The seemingly late downgrade prompted criticism from the administration of President Joe Biden as well as several prominent economists who questioned its timing and rationale .

Worse credit ratings could lead to higher borrowing costs for the government, and impact financial markets and consumer loans like mortgages. Standard and Poor’s previously downgraded U.S. credit in 2011 in the aftermath of a debt ceiling standoff and has yet to restore it, leaving Moody’s as the only major credit agency giving U.S. sovereign debt a AAA rating.

The S&P 500 stock index and the Dow Jones Industrial Average fell Wednesday morning in the wake of the news, while yields on 10-year treasury notes rose.

Here’s what economists and officials are saying about Fitch’s decision:

White House press secretary Karine Jean-Pierre

“We strongly disagree with this decision. The ratings model used by Fitch declined under President Trump and then improved under President Biden, and it defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world.”

Mark Zandi, chief economist at Moody’s Analytics

“Fitch’s downgrade of U.S. Treasury debt to AA+ is off-base, IMHO. They rate the sovereign debt of a rather lengthy list of countries AAA. Really? Ask global investors whose bonds they would rather own if push comes to shove in the global economy – it’s those of the U.S. Treasury.” 

Sean Snaith, director of University of Central Florida’s Institute for Economic Forecasting

“This is a warning shot across the U.S. government’s bow that it needs to right its fiscal ship. You can’t just spend trillions of dollars more than you have in revenue every year and expect no ill consequences.”

Jason Furman, professor of economics at Harvard and former top economics advisor to President Barack Obama

“This is completely absurd. And is more likely to show that Fitch is irrelevant to the views of investors in U.S. sovereign debt than it is to show investors anything about the United States.”

Treasury Secretary Janet Yellen

“I strongly disagree with Fitch Ratings’ decision. The change by Fitch Ratings announced today is arbitrary and based on outdated data. Fitch’s quantitative ratings model declined markedly between 2018 and 2020 – and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its decision.”

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a think tank that argues for lower federal spending deficits

“As Fitch points out, our national debt is high, deficits are rising rapidly, interest costs are consuming an increasing share of revenue, and we have numerous major fiscal challenges on the horizon. We also came far too close to default during the last debt limit debate. …Whether one agrees with Fitch’s decision to downgrade the United States government or not, we are clearly on an unsustainable fiscal path.”

Mohamed El-Erian, president of Queen’s College Cambridge and chief economic advisor at Allianz

“I am very puzzled by many aspects of this announcement, as well as by the timing. I suspect I won’t be the only one. The vast majority of economists and market analysts looking at this are likely to be equally perplexed by the reasons cited and the timing. Overall, this announcement is much more likely to be dismissed than have a lasting disruptive impact on the US economy and markets.”