US Credit Downgrade Sparks More of the Fighting It Warned About
The Debt

US Credit Downgrade Sparks More of the Fighting It Warned About

Reuters/Leah Millis

The downgrade of the U.S. credit rating from AAA to AA+ by Fitch on Tuesday has produced a range of reactions from politicians, economists and Wall Street analysts. Here’s a roundup of key points.

Political finger-pointing aplenty: Democrats and Republicans took turns blaming each other for the downgrade, with the former focusing on the recent showdown over raising the debt ceiling, in which Republicans refused to raise the debt limit unless Democrats agreed to spending cuts.

“The downgrade by Fitch shows that House Republicans’ reckless brinksmanship and flirtation with default has negative consequences for the country,” Senate Majority Leader Chuck Schumer said in a statement. “Republicans need to learn from their mistakes and never push our country to the brink of default again.”

Senate Budget Committee Chair Sheldon Whitehouse, Democrat from Rhode Island, said there’s “a straight line from Republicans’ manufactured debt crisis to Fitch’s downgrade,” while Rep. Brendan Boyle, the top Democrat on the House Budget Committee, said, “Fitch’s decision to downgrade rests on the shoulders of Speaker McCarthy and the extreme MAGA Republicans who openly rooted for default.”

Republicans charged that it was President Biden’s fault for refusing to negotiate at an earlier date. “When Fitch specifically cited the problem of ‘last-minute’ resolutions, they may as well have noted Biden’s refusal to negotiate with Republicans for months, while insisting on even more wasteful spending,” House Ways and Means Committee Chairman Jason Smith, a Republican from Missouri, told Fox News.

The conservative House Freedom Caucus also blamed Biden, saying he “played politics with a possible government default.” They also indicated that they would push for more spending reductions during the budget process this fall. “The Fiscal Responsibility Act debt ceiling deal does not change our nation’s trajectory,” they said on the social media site formerly known as Twitter. “It's time to end Washington’s addiction to spending, and we have an opportunity to begin that during the appropriations process.”

A defense of the U.S. economy and the Biden administration: Citing a string of recent strong economic reports, Treasury Secretary Janet Yellen sharply criticized the downgrade. “Fitch’s decision is puzzling in light of the economic strength we see in the United States,” she said in prepared remarks for an event in Virginia. “I strongly disagree with Fitch’s decision, and I believe it is entirely unwarranted. Its flawed assessment is based on outdated data and fails to reflect improvements across a range of indicators, including those related to governance, that we’ve seen over the past two and a half years. Despite the gridlock, we have seen both parties come together to pass legislation to resolve the debt limit, as well as to make historic investments in our infrastructure and American competitiveness.”

Yellen added that the Fitch move “does not change what all of us already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong.”

Questions about how much it really matters: JPMorgan Chase CEO Jamie Dimon said the downgrade “doesn’t really matter that much” because borrowing costs are determined in the market, not by ratings agencies.

Dimon questioned the idea that countries that rely on the U.S. for security and stability, such as Canada, will have higher credit ratings. “To have them be triple-A and not America is kind of ridiculous,” he told CNBC. “It’s still the most prosperous nation on the planet, it’s the most secure nation in the planet.”

Dimon also called on lawmakers to “get rid of the debt ceiling,” which causes unnecessary uncertainty for investors when it’s used as a hostage in budget negotiations.

A stock market selloff: Stocks fell on Wednesday, with the S&P 500 dropping 1.3%, the Dow Jones Industrial Average down nearly 1% and the NASDAQ tumbling 2.1%. Although it’s never entirely clear why stocks move the way they do on any given day, the narrative Wednesday was that boosted borrowing plans from the Treasury Department and the Fitch downgrade were the immediate cause of the market decline. Treasury said it plans to increase its sale of long-term debt next week to a total of $103 billion, up from the previous estimate of $96 billion.

Bond investors on Wednesday pushed U.S. Treasury yields higher, with the 10-year hitting 4.12%, its highest level since November 2022, while the 30-year hit 4.2%, a nine-month high.

“The timing of the downgrade is a bit weird, but the fiscal situation in the U.S. is concerning,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management, per Bloomberg. “And this downgrade happens amid the Treasury refunding, so we might see term premium rising and curve steepening.”

Still, if fears are rising about instability in the global financial markets, that could increase demand for Treasuries as investors rush to buy safe assets — which would likely reduce rates. “U.S. Treasuries remain the preeminent safe haven asset with no practical substitute,” Ed Al-Hussainy, a global rates strategist at Columbia Threadneedle, told Bloomberg.

A renewed focus on the national debt: Whatever the short- and long-term implications may be, the downgrade does draw attention to the large and ever-increasing national debt, and the rising cost of servicing that debt as interest rates rise.

Some analysts speculated that the debt could ultimately result in higher taxes that reduce income and slow the economy. “Ultimately, if the deficit isn’t contained, taxes will be raised to the point that the engine of the US economy — the all-important consumer — will have considerably less discretionary income,” said Quincy Krosby, chief global strategist for LPL Financial.

The deficit hawks at the Committee for a Responsible Federal Budget said the downgrade should serve as a “wake-up call” for lawmakers to do something about the nation’s fiscal trajectory. “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,” the group said in a statement. “Whether one agrees with Fitch’s decision to downgrade the United States government or not, we are clearly on an unsustainable fiscal path. We need to do better.”

Worries about more strife ahead: Ian Shepherdson, chief economist of Pantheon Macroeconomics, pushed back against the idea that the U.S. may not be able to afford its interest costs, and instead emphasized the political nature of the downgrade.

“This is not an argument that the U.S. won’t be able to make payments,” Shepherdson told Bloomberg. “The point they’re making is more about governance issues. It’s the potential risk that you’ll get your payments late.”

Richard Francis, a senior director at Fitch Ratings, told CNBC on Wednesday that politics did indeed play a major role in the downgrade. Fiscal concerns are important, but so too is the political polarization in the U.S. that produced not just the showdown over the debt ceiling but also the attempted insurrection on January 6, 2021.

“You have the debt ceiling, you have Jan. 6. Clearly, if you look at polarization with both parties … the Democrats have gone further left and Republicans further right, so the middle is kind of falling apart basically,” Francis told CNBC.

Francis added that the U.S. could win back its top rating by dealing with its major social programs, which need more revenue, with the goal of reducing deficits and stabilizing debt. Suspending or even eliminating the debt ceiling would also be beneficial, Francis said.

Hope for a decline in political strife is hard to come by, however. With House Republicans threatening to push for lower spending levels in 2024 than those in the budget agreement reached in June, the potential for more brinksmanship this fall is growing, with many analysts expecting to see another government showdown at some point.

Speaking about the likely budget battle ahead, Marc Goldwein of the Committee for a Responsible Federal Budget told Bloomberg that the fight may provide another example of the inability of lawmakers to work together productively. “I worry it is going to inflame the chances of a shutdown and prove Fitch right,” he said.