The US political instability reflected in the January 06, 2021, insurrection at the Capitol was a factor in the downgrading has further confused the Beltway, which was already reeling from a third indictment of former President Trump.
Fitch downgraded its issuer default rating for the US on Tuesday evening, surprising investors, roiling equity markets and sending bond yields higher Wednesday morning.
Treasury Secretary Janet Yellen was also vocal about the move by Fitch Ratings, slamming it on Wednesday as flawed and entirely unwarranted.
“Fitch’s decision is puzzling in light of the economic strength we see in the United States,” Yellen said in prepared remarks.
“The US remains the world’s largest, most dynamic, and most innovative economy — with the strongest financial system in the world.”
The agency cited the erosion of governance and fiscal deterioration over the next three years as reasons for the downgrade, also mentioning the debt ceiling default that nearly crashed the US and global economy in June.
“You have the debt ceiling; you have January 06, 2021. Clearly, if you look at polarization with both parties … the Democrats have gone further left and Republicans further right, so the middle is kind of falling apart basically,” Richard Francis, a senior director at Fitch, told Reuters.
The downgrade is being met with criticism from both parties, who don’t seem to be shying away from pointed partisan rhetoric despite the assessment of increasing polarization.
“We strongly disagree with this decision. The ratings model used by Fitch declined under President Trump and then improved under President Biden,” White House press secretary Karine Jean-Pierre said in a Tuesday statement.
“It’s clear that extremism by Republican officials — from cheerleading default, to undermining governance and democracy, to seeking to extend deficit-busting tax giveaways for the wealthy and corporations — is a continued threat to our economy,” she said.
“The United States faces serious long-run fiscal challenges. But the decision of a credit rating agency today, as the economy looks stronger than expected, to downgrade the United States is bizarre and inept,” posted former Treasury Secretary Larry Summers on X, the platform formerly known as Twitter.
Blaine Luetkemeyer said in a Wednesday statement he had concerns about Fitch’s history of subjective ratings but also went after Democrats’ spending that he called reckless.
“Reckless fiscal policy that caused the inflation we’re still suffering is also harming confidence in our currency and treasuries. House Republicans understood this truth which is the reason Speaker -Kevin McCarthy - made countless attempts to start a dialogue with the White House months before the debt limit was reached,” Luetkemeyer said.
Other GOP members said that Biden’s recent legislative decisions were the key in pushing Fitch into deciding the government could not work together.
“When Fitch specifically cited the problem of ‘last-minute’ resolutions, they may as well have noted Biden’s refusal to negotiate with Republicans for months, while insisting on even more wasteful spending,” House Ways and Means Committee Chairman Jason Smith said on Fox News on Tuesday.
“President Biden’s brinksmanship — not to mention the US$10 trillion in new spending he and Washington Democrats passed over the past two years — pushed America’s credit rating off the ledge,” Smith said.
“Now families and small businesses already dealing with soaring interest rates and lost wages from Biden’s inflation crisis will also have to face the consequences of a reduced confidence in America’s sovereign debt.”
Yellen reiterated that the new Fitch rating does not change what all of us already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong.
The White House may be working on a proposal following the creation by Biden of a working group in July to look at ways to minimize debt ceiling brinkmanship.
“President Biden should be commended for making reform of our broken debt limit process a priority,” Shai Akabas, executive director of economic policy with the Bipartisan Policy Center, a Washington think tank, said in a statement last month.
“We urge him to work with congressional leaders from both parties on reform that will avoid the kind of brinkmanship we experienced earlier this year,” he wrote.
