America’s credit score slashed, but not an economic disaster

America's credit score slashed, but not an economic disaster

Fitch Downgrades US Credit Score: What Does it Really Mean?

In a surprising move, ratings agency Fitch downgraded America’s credit score on Tuesday. But before you start to panic, let’s take a closer look at what this actually means for the US economy.

The Ratings Cut: Reason for Concern?

At first glance, Fitch’s decision might sound like a disaster for the economy and a blow for Joe Biden’s administration. The ratings agency cited political polarization in Washington DC as the main reason for its downgrade, expressing concerns about the government’s ability to repay its massive $31.4 trillion debt, which is expected to increase by another $1 trillion in the third quarter of 2023.

However, Treasury Secretary Janet Yellen swiftly responded by criticizing Fitch’s guidance as “arbitrary and based on outdated data”. She highlighted the economic strength of the United States and dismissed the downgrade as a minor setback.

Putting the Downgrade into Perspective

Yellen’s point is valid. Fitch’s downgrade is akin to an individual’s credit score slipping from exceptional to merely very good. While it may still raise eyebrows, it’s important to note that the US credit rating remains on par with Canada and is seen as more reliable than the UK and France. The argument made by Fitch that the US has experienced a “steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters” is hardly surprising news to anyone who has been following American politics since 2016.

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Despite the widening gap between the Democrats and Republicans, they were able to reach a last-minute debt-ceiling deal to prevent a catastrophic default just two months ago. This demonstrates that even amidst political polarization, there is still an ability to find common ground when necessary.

Economic Optimism and Market Response

The downgrade should not overshadow the recent economic optimism and positive indicators. Second-quarter growth has exceeded forecasters’ expectations, inflation is steadily cooling, and unemployment remains below 4%. Major Wall Street institutions, such as Bank of America, have even reversed their recession forecasts in response to this positive data. The Federal Reserve has also expressed confidence that the US is unlikely to experience a long-predicted economic slump this year.

The stock market’s response further supports the notion that Fitch’s downgrade is not a major cause for concern. Back in 2011, when fellow “Big Three” agency S&P Global downgraded the US rating, the S&P 500 crashed 6.5% in a single day and took six months to recover. However, this time around, the index only slipped 1%, and investors did not rush to the usual “safe haven” assets in times of crisis. Both 10-year Treasury yields and the popular gauge of dollar strength only saw slight increases.

In other words, Fitch’s downgrade had little impact on Wall Street’s confidence in the US economy. Instead of panicking, investors remained optimistic, suggesting that they believe the downgrade is a minor setback rather than an economic catastrophe.

The Takeaway: A Minor Setback

When looking at the bigger picture, Fitch’s downgrade is a relatively minor setback and should not overshadow the positive economic developments of recent months. The political polarization in Washington DC has been an ongoing issue, yet progress continues to be made. The US’s credit rating remains strong compared to other major economies, and market response to the downgrade was far from a meltdown.

It’s important to keep in mind that economic indicators point towards continued growth and stability. While the downgrade serves as a reminder to address the issues of political polarization and debt management, it should not detract from the overall positive outlook for the US economy.

So, take a deep breath, because the Fitch downgrade is no cause for alarm.

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