News & Insights

Thoughts on Fitch Credit-Rating Downgrade of U.S. Government Credit

On Aug. 1, 2023, Fitch Ratings downgraded from “AAA” to “AA+” the long-term credit rating of the U.S. government.

Treasury Secretary Janet Yellen quickly responded, saying the action by Fitch was “outdated” without giving any cogent counter arguments. Her point is fair, but from the perspective of “what took them so long?” After all the years of massive and increasing federal deficits, compounding into an ever-growing pile of cumulative debt (chart attached) there becomes a point where the sum is too great to ignore. The potential market reactions are summarized below, but over the short term this Fitch action isn’t likely to have much of an effect on the government’s borrowing ability. The lack of near-term market response does not mean that Fitch’s analysis is flawed, but it implies long-term repercussions if the country stays on the current trajectory. Keep in mind that the Congressional Budget Office (the official forecasting agency for Congress) just released in June a report showing that by 2029 the interest payable component of the U.S. federal debt will surpass total defense spending, becoming the third largest federal expenditure. Fitch shouldn’t be blamed for taking this step; we should be looking at the other credit rating firms and asking why they haven’t.