On Wednesday, the reaction to Fitch Ratings downgrading the US’s pristine credit rating was split on screen: the White House expressed outrage and investors on the Treasury bond market reacted with relative calm.
Fitch downgraded on Tuesday from triple A+ to double A+, citing an “erosive governance” and the growing debt of the US. Two months ago, the country narrowly avoided default due to political disputes over the federal borrowing cap.
Biden’s administration was furious, issuing a press release that quoted pundits who called the decision “absurd”, “off-base” and “widely and correctly ridiculed”.
Karine Jean-Pierre is the White House Press Secretary. She said: “It’s defying reality to downgrade America at a time when President Biden delivered the strongest economic recovery in any major economy around the world.”
The White House seemed to be afraid that the downgrade would give Republicans an opportunity to accuse Biden officials, of mishandling America’s public finances. Democrats hoped the deal reached with Republican Speaker Kevin McCarthy in June to avoid a default on debt had put these criticisms to bed.
Fitch’s action came after S&P similarly downgraded in 2011 following a showdown over the debt ceiling when Democrat Barack Obama served as president.
Fitch raised the red flag about “a steadily deteriorating standard of governance in the last 20-years” despite the recent deal to suspend debt limits until January 2025. Fitch expects that the general government’s deficit will rise from 3.7 percent to 6.3% of GDP in 2023.
Interest payments have increased as interest rates were raised by the Federal Reserve to their highest level in over 22 years. The Treasury Department announced on Wednesday that the US will have to borrow additional money in the next few months.
US Treasuries are held by many because they are perceived as being extraordinarily safe. Treasuries are held by nearly every central bank in the world, and they provide a basis for asset valuations. Fitch’s lower credit rating indicates that it believes the risk of US default is greater.
Fitch’s downgrade is not expected to alter the role of Treasury bonds in the global market. The downgrade will not force investors to sell US debt, nor is the cost of borrowing expected to increase.
Eric Winograd said, “I find it completely and totally irrelevant.” The asset manager AllianceBernstein is the director of developed economic market research. “I’ve been trying to think of a reason that investors would be interested in this and I haven’t been able. The likelihood of a US default is the same as yesterday.
Jamie Dimon is the chief executive officer of JPMorgan Chase in the US. He described Fitch’s downgrade of their bank as “ridiculous”. Dimon also noted the strength of US economy. However, he added that the decision “doesn’t really matter”.
Analysts said that the decision of Fitch will not require investors to replace Treasuries with other triple-A rated debt in portfolios.
Goldman Sachs stated in a report that it does not believe any significant holders of Treasury Securities will be forced into selling due to a downward rating. Because Treasury Securities are an important asset class most investment mandates, and regulatory regimes, refer to them exclusively, instead of AAA-rated government bonds.
Goldman noted that S&P’s downgrade of the US in 2011 had little impact on the markets.
Peter Tchir is the head of macro strategy for Academy Securities. He said, “Nobody buys Treasuries due to their rating.” US Treasuries can be mandated directly, or with other government-backed debt. “The downgrade of Fitch has no impact on yields.”
Treasury markets responded modestly to Fitch’s decision and to the US plan for increased borrowing announced on Wednesday. Benchmark 10-year Treasury Yields briefly reached a nine-month peak before retreating and remaining at 4.08 percent. The S&P 500 index ended Wednesday with a 1.4% decline. Fitch, which had warned of a possible US downgrade in May, announced its decision on the same afternoon that former President Donald Trump was Indicted On charges related to attempts to reverse the 2020 election which gave the White House to Joe Biden. Richard Francis, a senior Fitch Director, told Reuters the agency had also taken into account the attack on Capitol Hill on January 6, 2021 when making its decision.
Washington officials seemed to give Fitch’s rating change greater weight than most investors. Janet Yellen – Biden’s Treasury Secretary – blasted it as arbitrary and based outdated data.
Jason Smith, Republican chair of House Ways and Means Committee, claimed that Biden “pushed America’s rating off the edge”, despite the fact that the US fiscal issues are a result of policies implemented by both parties.
Smith stated that “Families and small businesses, who are already struggling with the inflation crisis caused by Biden and its soaring rates of interest and wage losses, will now also be forced to deal with the effects of a decreased confidence in America’s government debt.”
Jean-Pierre accused Republicans “extremism”, from cheerleading default to undermining democracy and governance, and seeking to extend tax giveaways that would reduce deficits to the wealthy and corporations.