U.S. Credit Profile Downgraded by Fitch Ratings

Fitch Ratings, a reputable credit rating agency, has downgraded the United States' credit profile from AAA to AA+. This decision reflects several key factors such as the expected deterioration of the country's fiscal situation, a significant and increasing government debt burden, and a decline in governance, specifically in response to repeated debt-limit standoffs.

Over the past two decades, there has been an evident and concerning decline in the standards of governance in the United States. Despite the recent debt-ceiling agreement, Fitch emphasizes that confidence in fiscal management has been eroded due to political standoffs and last-minute resolutions surrounding the debt limit. The agency highlights that various economic shocks, along with tax cuts and new spending initiatives, have contributed to a series of debt increases over the last ten years.

Additionally, Fitch recognizes the limited progress made in addressing medium-term challenges related to rising social security and Medicare costs caused by an aging population. As a result, the agency expects the general-government deficit to rise to 6.3% of the United States' gross domestic product this year, up from 3.7% in 2022.

In response to the downgrade, Treasury Secretary Janet Yellen criticized Fitch's decision as arbitrary and based on outdated data. Yellen maintains that Treasury securities remain the world's leading safe and liquid asset, reiterating the fundamental strength of the American economy.

Overall, Fitch Ratings' downgrade highlights significant concerns regarding the U.S. credit profile, influenced by factors such as fiscal deterioration, a growing government debt burden, and governance issues. Despite differing opinions, this decision serves as a reminder of the importance of addressing these pressing economic challenges for the United States.

US Economy Facing Recession, Says Fitch

Fitch Ratings has predicted a mild recession for the US economy in the last quarter of this year and the first three months of next year. The credit agency attributes this downturn to tighter credit availability, a decline in business investment, and a slowdown in consumption. Fitch expects GDP growth to slow to 1.2% this year, down from 2.1% in 2022, with overall growth reaching just 0.5% in 2024.

Despite this, Fitch highlights some positive aspects of the US economy, supporting its new AA+ rating. The agency points out that the country benefits from a well-diversified, high-income economy and a dynamic business environment. Furthermore, the US dollar's position as the preeminent reserve currency affords the government significant flexibility in financing.

The response of stock-market investors to Fitch's warning remains to be seen when the market opens on Wednesday. On Tuesday, the Dow Jones Industrial Average rose by 0.2%, while the S&P 500 index dropped by 0.3%.

This week, several major US companies, including Amazon.com Inc. and Apple Inc., are set to release their financial reports as part of the ongoing earnings season.

On the other hand, US borrowing costs have been increasing due to higher yields on Treasury bills. The Treasury Department has been issuing a large number of Treasuries since the debt-ceiling deal in June. Currently, the 1-month Treasury yield stands at 5.36%, and auctions for other Treasury bills often result in yields surpassing 5%.

For more information, read: 'Eye-popping' $1 trillion third-quarter borrowing need from U.S. Treasury raises risk of buyers' fatigue

Note: Joy Wiltermuth contributed to this report.