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By Aleks Phillips
U.S. News Reporter
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Fitch Ratings, one of three large credit analysis agencies, downgraded the U.S. government's credit rating on Tuesday, citing a number of reasons for its decision, including rising public debt and the possibility that America will slide into a "mild" recession.
The federal government now carries a rating of AA+, down one rung from AAA, the highest possible rating. Fitch also criticized America's political polarization and said high interest rates had contributed to the decision among a number of "key rating drivers."
The move suggests that standoffs in Washington D.C. over how to run the public purse could prove costly for taxpayers, with a lower credit rating potentially leading to a higher interest burden on U.S. government borrowing.
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Fitch's announcement is just the second time the U.S. has faced having its credit rating downgraded; in 2011, Standard & Poor's downgraded it from AAA amid a previous fight over the debt ceiling which the Government Accountability Office reported in 2012 cost the Treasury $1.3 billion.
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The Biden administration criticized the downgrading, with Treasury Secretary Janet Yellen describing it as "arbitrary and based on outdated data," noting the large infrastructure bills it had passed early on in Biden's term and the recent bipartisan deal to raise the debt ceiling.
Here are some of the key takeaways from the announcement:
Lower Growth
Fitch forecast that the U.S. economy would tumble into a "mild recession" this winter, citing "tighter credit conditions, weakening business investment, and a slowdown in consumption."
In March, the Federal Reserve had made a similar prediction in the wake of the collapse of several large banks which suffered from a devaluation of bond prices after drastic interest rate rises from the central bank.
However, in late July, Jerome Powell, chair of the Federal Reserve, announced that its economists were no longer forecasting that the U.S. would enter into a recession thanks to recent "resilience" in the economy. They still predicted a "noticeable slowdown in growth starting later this year."
Fitch said that it saw a recession as likely occurring in the final quarter of 2023 and the first quarter of 2024, with real GDP growth slowing to 1.2 percent this year—down from 2.1 percent in 2022—and then to 0.5 percent next year.
It added: "Job vacancies remain higher and the labor participation rate is still lower (by one percentage point) than pre-pandemic levels, which could negatively affect medium-term potential growth."
New Spending Initiatives
While the economy slips into recession, Fitch also expects the federal government's deficit to nearly double due to "weaker federal revenues, new spending initiatives and a higher interest burden."
It said that the government deficit would rise to 6.3 percent of GDP by the end of 2023, up from 3.7 percent in 2022.
The amount of funding given to large projects crafted by the Biden administration was a key point of division between it and House Republicans while negotiating raising the debt ceiling in May, the latter initially wishing to cut $4.8 trillion over the next decade from the federal budget.
An early bill passed by House Republicans would have reversed some flagship elements of Biden's agenda, including his clean energy tax credits, which were one of the consumer-centered elements of his Inflation Reduction Act. Credits for home energy efficiency measures and electric vehicles were key to the president's vision to move America towards a green economy.
The deal thrashed out between Biden and House Speaker Kevin McCarthy, just days before the Treasury anticipated it would run out of cash, saw spending cut by $1.5 trillion over the next decade, as well as rescinding leftover coronavirus pandemic funding.
Biden said the bill that eventually passed protected "key priorities and accomplishments" from his first two years in office, but that "neither side got everything it wanted."
Fitch said that the government debt to GDP ratio for the U.S. was 112.9 percent this year, and is forecast to rise to 118.4 percent by 2025, whereas the median debt-to-GDP ratio for other AAA-rated nations was around 39.3 percent.
Newsweek approached the Treasury via email for comment on Wednesday.
Raised Interest Rates
After dropping the federal interest rate—a benchmark for other lenders—to 0.25 percent during the pandemic, the federal reserve has ratcheted it back up since early 2022 and it now stands at 5.25-5.5 percent.
While the rate during the pandemic was unusually low, the set of rapid rises by more than five percent in just over a year was aimed at tackling high inflation after the nation began to emerge from COVID-19.
Fitch said it expects a further hike to 5.75 percent by September, but said that the issues it saw with the resilience of the economy and the labor market were "complicating" the Federal Reserve's bid to rein in inflation, which remained "stubbornly high."
A Federal Reserve spokesperson declined to comment when approached by Newsweek.
A Political Disconnect Over Public Finances
The credit rating agency had warned on May 24 that it was considering removing the U.S. government's AAA rating while uncertainty loomed over the debt ceiling as talks remained ongoing in Washington D.C.
At the time, experts cautioned of the instability the political divergence was causing, as yields on Treasury bills soared and portfolio managers were reportedly avoiding risk.
On Tuesday, Fitch said there had been "a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025."
It argued that "repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management" while a "complex" budgeting process and economic shocks had "contributed to successive debt increases over the last decade."
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