Fitch Ratings’ decision to downgrade the federal government’s credit rating is not just an embarrassing black eye for Washington, but economists said it will also hit the government — and possibly average Americans — in the wallet.
Fitch dropped America’s long-term foreign currency issuer default rating to AA+, a step down from the top-tier AAA rating, for only the second time in history.
While that’s still a highly favorable rating, the drop could downgrade bonds and increase interest rates, said Chris Edwards, an economist at the Cato Institute who said that could eventually lead to a debt “death spiral.”
“It’s a big sign that Washington needs to cut spending elsewhere,” Mr. Edwards told the Washington Times. “It’s going to drive the American economy to the poor house.”
Ralph Sonenshine, an economics professor at American University, said the difference between a AAA rating and AA+ is “minimal.” But he said it’s a warning sign the country should heed to avoid future downgrades, which he said could lead to a debt squeeze that could reach American households.
“The cost of borrowing is going up,” Mr. Sonenshine said. “So when you’re buying something on credit, whether it’s a car, for example, a new home, that just makes it more expensive.”
The last time the country’s credit rating was downgraded, by S&P Global Ratings in 2011, the stock market gradually dropped by 17%, Mr. Sonenshine said.
So far, the stock market has been mildly impacted by Fitch’s move. The S&P 500 dropped by 1.45%, while the Dow Industrial Average dropped by 0.99%.
Fitch Ratings cited a “steady deterioration in standards of governance” over the last two decades as a reason for the decrease in credit rating.
But Richard Francis, co-head of Fitch Ratings, said that the bigger issue was brinkmanship by Republican and Democratic lawmakers in squabbles over the debt ceiling.
Mr. Francis also took issue with how neither party could come up with long-term solutions for looming fiscal issues surrounding entitlement programs like Social Security and Medicare.
“I think these are the type of things that highlight the importance of government, and also the inability of the government and both parties to come up with some kind of solution,” Mr. Francis told CNBC.
Fitch, in its announcement of the downgrade, said the federal deficit is rising, spending is growing, tax revenue is slipping and efforts to trim the debt have been too timid.
Fitch also bucked other analysts to suggest that the economy will slip into “a mild recession” at the end of this year.
Phil Kerpen, president of the conservative nonprofit economic think tank American Commitment, called this week’s downgrade “mostly meaningless.”
“I think Fitch was playing politics and trying to give a political weapon to Democrats, but I’m not sure that it gives them any more ammunition than they already had. I don’t think it has any great effect,” Mr. Kerpen told The Times.
Of the three top ratings agencies, only Moody’s currently has the U.S. still at AAA.
In the wake of Fitch’s downgrade, Democrats and Republicans traded blame.
President Biden’s team said that Fitch’s data showed the deterioration in the U.S. position happened during the Trump administration and has, in fact, improved slightly in the last couple of years.
Treasury Secretary Janet Yellen called Fitch’s move “puzzling.”
“I strongly disagree with Fitch’s decision, and I believe it is entirely unwarranted,” she said Wednesday. “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.”
Republicans said the downgrade is a black eye on Mr. Biden’s economic stewardship.
House Ways and Means Chairman Jason Smith, Missouri Republican, pointed out that the 2011 downgrade also happened when Mr. Biden was in the White House — that time as vice president when he oversaw President Obama’s stimulus spending.
“Now families and small businesses already dealing with soaring interest rates and lost wages from Biden’s inflation crisis will also have to face the consequences of a reduced confidence in America’s sovereign debt,” Mr. Smith said.