Janet Yellen criticizes Fitch’s downgrade of U.S. credit as ‘unwarranted’ and says U.S. has the world’s ‘most dynamic’ economy.

Janet Yellen criticizes Fitch's downgrade of U.S. credit as 'unwarranted' and says U.S. has the world's 'most dynamic' economy.

In a recent event in McLean, Virginia, former Federal Reserve Chair, Janet Yellen, expressed her puzzlement over Fitch’s decision to downgrade the United States’ credit rating to AA+. Yellen, known for her lively remarks, dismissed the downgrade, emphasizing the economic strength she sees in the US. She urged everyone to remember that the US remains the world’s largest, most dynamic, and most innovative economy, with the strongest financial system globally.

Yellen’s criticism of Fitch’s decision isn’t new ground in US finance. In fact, her predecessor, Timothy Geithner, had a similar reaction 12 years ago when S&P Global Ratings became the first of the three major credit rating agencies to remove the US from its top, AAA rating. Now, Moody’s Investors Service is the only agency that continues to rate the US at the highest grade.

Despite Yellen’s optimism about the US economy, Fitch expressed concerns about the country’s financial governance, rising budget deficits, and expected fiscal deterioration over the next three years. This led to their decision to downgrade the US credit rating. However, the immediate reaction in Treasury markets was minimal, with little impact on the prices of government bonds. It wasn’t until stronger-than-expected jobs data and news of increased US debt issuance that Treasury prices started to slide.

One of Fitch’s key points of concern was the medium-term fiscal challenges that the US has failed to address. Yellen, on the other hand, remains optimistic about the longer-term debt picture, stating that interest costs are not historically high when adjusted for inflation.

Another contentious point in Fitch’s statement was their projection that the US would enter a mild recession in late 2023. This contradicts the assessment of several experts and reputable financial institutions. Bank of America Corp., for instance, recently reversed its own forecast for a recession, scrapping the earlier prediction.

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Despite the downgrade, Yellen reassured everyone that Treasury securities are still the world’s preeminent safe and liquid asset. She emphasized that the American economy fundamentally remains strong.

Yellen’s assurance was further supported by Treasury Assistant Secretary for Financial Markets, Josh Frost. He downplayed any risk of forced selling by investors, stating that in 2011, during the S&P event, there was no evidence of such behavior. He expressed confidence in the continued robust demand for Treasury securities.

The US Economy: Still a Powerhouse

Janet Yellen, a renowned economist and former Federal Reserve Chair, recently criticized credit rating agency Fitch for downgrading the United States’ credit rating to AA+. This move was met with puzzlement by Yellen, who highlighted the strength of the US economy and its position as the world’s largest, most dynamic, and most innovative economy. She also emphasized that the US has the strongest financial system globally.

Yellen’s criticism of Fitch’s decision echoed a similar sentiment expressed by her predecessor, Timothy Geithner, when S&P Global Ratings removed the US from its top, AAA rating 12 years ago. Moody’s Investors Service is now the only agency that continues to rate the US at the highest grade.

Fitch’s Concerns: Financial Governance and Fiscal Deterioration

Fitch’s decision to downgrade the US credit rating was driven by concerns over financial governance, rising budget deficits, and expected fiscal deterioration over the next three years. The agency highlighted medium-term fiscal challenges that remain unaddressed by the US government. However, the immediate impact on Treasury markets was minimal, with little change in the prices of government bonds.

The downgrade had limited influence until stronger-than-expected jobs data and news of increased US debt issuance began to affect Treasury prices. This accelerated the selloff of Treasuries. Fitch’s projection of a mild recession in late 2023 also contradicted the assessments of various experts and institutions. Bank of America Corp., for example, recently decided to reverse its own forecast for a recession, scrapping its earlier prediction.

Yellen’s Optimism and Reassurance

Yellen remains optimistic about the longer-term debt picture, arguing that inflation-adjusted interest costs are not historically high. Despite the downgrade, she reassured everyone that Treasury securities remain the world’s preeminent safe and liquid asset. Yellen emphasized that the American economy is fundamentally strong, countering Fitch’s concerns.

Josh Frost, Treasury Assistant Secretary for Financial Markets, supported Yellen’s stance by downplaying any risk of forced selling by investors. He mentioned that during the 2011 S&P event, there was no evidence of such behavior. Frost expressed confidence in the continued robust demand for Treasury securities.

Overall, while Fitch’s decision to downgrade the US credit rating to AA+ has raised eyebrows, Janet Yellen and other experts remain optimistic about the strength and resilience of the US economy. The downgrade is viewed by many as a temporary setback, with Treasury securities still considered the go-to safe haven for investors. As the US continues to drive innovation and growth, it is likely that its economic power will remain unrivaled in the global arena.