Late Tuesday, Fitch Ratings became the second of the three major credit-rating firms to remove its coveted triple-A assessment of the United States government’s credit worthiness
Late Tuesday, Fitch Ratings became the second of the three major credit-rating firms to remove its coveted triple-A assessment of the United States government’s credit worthiness, a move that spurred debate in Washington about spending and tax policies.
Fitch cited the federal government’s rising debt burden and the political difficulties that the U.S. government has had in addressing spending and tax policies as the principal reasons for reducing its rating from AAA to AA+.
Fitch said its decision “reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance” compared with other countries with similar debt ratings.
The downgrade may have little impact on financial markets long-term or on the interest rates the U.S. government will pay. Here’s what you need to know:
HOW DID THE GOVERNMENT GET TO THIS POINT?
Fitch’s move comes just weeks after the White House and Congress resolved a standoff on whether to raise the government’s borrowing limit. An agreement reached in late May suspended the debt limit for two years and cut about $1.5 trillion in spending over the next decade. The agreement came after negotiations approached a cutoff date after which Treasury Secretary Janet Yellen had warned the government would default on its debt.
The Biden administration reacted angrily to the move. Yellen said Wednesday that Fitch’s «flawed assessment is based on outdated data and fails to reflect improvements across a range of indicators, including those related to governance, that we’ve seen over the past two and a half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,» Yellen said.
But Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office, said that Fitch’s decision was the right one, given that there are few efforts in Washington to address the government’s longstanding budget deficit.
