Fitch Ratings, a renowned credit rating agency, made the decision to downgrade the United States' credit rating from AAA to AA+. This downgrade was attributed to the erosion of governance and the nation's projected fiscal deterioration in the coming years.
The rating agency cited deteriorating governance in the U.S. over the past two decades as one of the contributing factors for the downgrade. In addition, Fitch predicted that the general government deficit would increase to 6.3% of the gross domestic product (GDP) in 2023, up from 3.7% in 2022. This projection was based on factors such as weaker federal revenues, new spending initiatives, and a higher interest burden.
According to Fitch, there has been a steady decline in governance standards, particularly concerning fiscal and debt matters, over the last 20 years. The agency highlighted the repeated political disputes over the debt limit and last-minute resolutions that have eroded confidence in fiscal management. Fitch also pointed out that unlike most peer countries, the U.S. lacks a medium-term fiscal framework and has a complex budgeting process.
In May, Fitch had already expressed the possibility of downgrading the U.S.'s AAA ratings due to the prolonged debt-ceiling fight without a resolution. As a result of the Treasury Department's influx of Treasury issuance since the June debt-ceiling agreement, borrowing costs have increased significantly. The 1-month Treasury yield reached 5.36% on Tuesday, while auctions of one-year Treasury bills often yield above 5%.
Despite these developments, stock markets closed Tuesday near record levels. Both the Dow Jones Industrial Average (DJIA) and the S&P 500 index (SPX) were less than 5% away from their highest closing levels in early 2022.