Fitch downgrades U.S. after debt limit stalemate

Fitch Ratings on Tuesday downgraded the U.S. government's credit rating, after a partisan clash over its borrowing authority threatened default earlier this year.

Fitch lowered the U.S. debt rating to AA+ from AAA. The firm cited repeated debt-limit political standoffs, an inadequate fiscal framework and a complex budgeting process.

The announcement, which Fitch had warned might come for months, triggered an immediate rebuke from Biden administration officials including Treasury Secretary Janet Yellen.

“The change by Fitch Ratings announced today is arbitrary and based on outdated data,” Yellen said.

Fitch’s U.S. downgrade, the second by a major credit agency since 2011, could have lasting consequences for the role of the world's largest economy in global financial markets. While the U.S. still holds formidable advantages, Fitch on Tuesday warned that the U.S. is increasingly vulnerable to economic shocks.

“It’s not just the debt limit,” James McCormack, Fitch Ratings’ managing director and global head of sovereign and supranational ratings, said in an interview earlier this year. “What we’ve seen in the United States is a steady deterioration in governance.”

U.S. government debt is the bedrock of the global financial system. Some Wall Street analysts have warned that a downgrade could drive up costs on everything from municipal debt to credit cards.

But other economists Tuesday brushed off the impact.

"My sense is that the Fitch downgrade of the U.S. credit rating is an insignificant development and will not move financial markets or the economy," said RMS chief economist Joe Brusuelas. "As long as the Federal Reserve continues to treat US issues paper as AAA rated credit so will financial market participants."

Fitch warned lawmakers and administration officials that a downgrade could be imminent even after President Joe Biden and Speaker Kevin McCarthy brokered a deal to raise the debt limit in late May.

In addition to the debt ceiling, Fitch has also cited a potential recession, a failure to reach consensus on fiscal challenges and Republican attempts to contest the 2020 election as factors weighing on its decision.

Biden administration officials blasted the downgrade in a call with reporters on Tuesday evening. They said that Fitch repeatedly raised the Jan. 6, 2021 Capitol riot as a factor in conversations with the administration.

Yellen said that Fitch's 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.”

"The ratings model used by Fitch declined under President Trump and then improved under President Biden," White House press secretary Karine Jean-Pierre said in a statement. "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."