JPMorgan’s Jamie Dimon calls US credit rating downgrade ‘ridiculous’ compared to higher-rated countries depending on Washington.

JPMorgan's Jamie Dimon calls US credit rating downgrade 'ridiculous' compared to higher-rated countries depending on Washington.

Fitch Downgrades US Credit Rating: A Reason for Concern or Overblown?

In a surprising move this week, Fitch Ratings lowered the U.S. government’s credit rating from the top AAA grade to AA+. The agency cited an “erosion of governance,” pointing to repeated debt limit standoffs and last-minute resolutions as contributing factors. The downgrade also anticipates a potential deterioration in the country’s financial standing over the next three years, attributing it to tax cuts, increased government spending, economic shocks, and political division.

This isn’t the first time the U.S. has faced a downgrade in credit rating. Back in 2011, S&P Global Ratings made a similar decision, which led to widespread concern. However, Jamie Dimon, the CEO of JPMorgan, appears unconcerned by Fitch’s recent move, stating on CNBC that “it doesn’t really matter that much” because markets, not ratings agencies, determine borrowing costs. Dimon went on to criticize Fitch’s decision, labeling it “ridiculous” considering that other nations depending on American stability have better credit ratings.

Debt Ceiling Concerns and Dimon’s Standpoint

Dimon believes that the U.S. should eliminate the debt ceiling, a recurring issue causing credit rating troubles. The debt ceiling, introduced in 1917, is the legal limit on the federal government’s total borrowing capacity. The government reached the debt ceiling for the 79th time in 2023, coming dangerously close to defaulting on its debts. Policymakers reached a bipartisan deal just days before a June deadline, narrowly avoiding a potential $12 trillion blow to the U.S. economy.

Chiming in on Dimon’s standpoint is former Treasury Secretary Larry Summers, who labeled Fitch’s downgrade as “bizarre and inept.” Summers expressed his disbelief on X (formerly Twitter), noting that the U.S. economy currently appears stronger than expected. He later told Bloomberg that he doubts any serious credit analyst would give weight to Fitch’s decision.

On the other hand, Mohamed El-Erian, President of Queens’ College Cambridge and economic advisor to Allianz and Gramercy, found Fitch’s downgrade surprising. He questioned the timing of the move, as Fitch hadn’t provided any new evidence since May that would warrant a change in their assessment of America’s creditworthiness.

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Janet Yellen’s Response and the Resilience of the US Economy

Treasury Secretary Janet Yellen expressed her strong disagreement with Fitch’s decision, calling it “flawed” and “entirely unwarranted.” Yellen emphasized that the U.S. remains the world’s largest, most dynamic, and most innovative economy, with the strongest financial system. She argued that Fitch’s assessment seems puzzling given the economic strength evident in the United States.

Indeed, recent economic data has shown resilience in the U.S. economy. The second-quarter growth exceeded expectations, while inflation has cooled down for the 12th consecutive month, reaching 3% in June. These positive indicators further challenge Fitch’s downgrade.

Is the Downgrade Justified or Exaggerated?

The mixed opinions surrounding Fitch’s credit rating downgrade raise the question of its true significance. While some experts, including JPMorgan’s Jamie Dimon, question the impact of such a downgrade, others, like former Treasury Secretary Larry Summers, consider it nonsensical.

It is important to note that credit ratings agencies have their own methodologies, and their assessments can be subjective. Moreover, markets ultimately determine borrowing costs, meaning that investors may not react significantly to this downgrade.

Nonetheless, Fitch’s decision highlights underlying concerns about the U.S.’s ability to address its debt ceiling and political divisions. These issues have the potential to affect investor confidence and future borrowing costs.

Amidst the chorus of critics and the resilience of the U.S. economy, it remains to be seen how Fitch’s credit rating downgrade will truly impact the country’s financial standing. While such ratings hold importance, they should be interpreted with caution and in the context of broader economic indicators.