Few can argue with Fitch’s decision to slash the U.S. rating from AAA to AA+. When a revered institution sounds the alarm over America’s swelling debt and wavering fiscal discipline, it’s time to sit up and listen.
A decade has passed since Standard & Poor raised eyebrows by cutting its rating on U.S. debt. Yet, this week, Fitch took a similar step, setting Wall Street abuzz.
Echoes of 2011
Blackstone’s top dog, Stephen Schwarzman, isn’t among the naysayers. On CNBC’s “Squawk Box”, he defended Fitch’s position with a sobering analysis of America’s ballooning debt.
While he acknowledged the U.S.’s status as the world’s reserve currency, he couldn’t overlook the glaring fiscal mismanagement that has plagued recent years.
But here’s the twist: Unlike the 2011 downgrade, which spurred a brief economic panic, Fitch’s latest move left many economists unfazed. Surprisingly, some even questioned the timing.
Mohamed El-Erian of Allianz voiced his puzzlement over this “strange move,” especially given recent strides in raising the debt ceiling and combating inflation.
Fitch’s Rationale and the Economic Aftermath
Diving into Fitch’s reasoning, they cited a forecasted fiscal decline over the coming three years, coupled with the U.S.’s growing government debt burden.
The strained relationship among congressional factions, frequent tussles over the debt ceiling, and numerous budget impasses further justified their decision.
Yet, some believe the U.S. economy is resilient enough to brush off this downgrade. Veronique de Rugy of the Mercatus Center argues that while the downgrade should be a significant concern, its immediate economic impact might be mild.
However, with the national debt skyrocketing to a whopping $32.6 trillion—a 40% jump since the pre-Covid era—she insists that it’s high time for bipartisan efforts to rein in this growing monster.
Most of Wall Street seems to share this muted concern. Heavyweights like Goldman Sachs highlight that Fitch’s announcement is mostly a reiteration of existing fiscal information, seeing no immediate risk for Treasury or municipal debt holders.
Capital Economics added to the debate, noting the peculiarity of downgrading the U.S. during its attempt to tame inflation without plunging into a recession.
The real test lies ahead. If the U.S. effectively tackles inflation, the Federal Reserve might consider slashing interest rates by next year, thus reducing the government’s borrowing expenses.
But if they falter and maintain a higher nominal interest rate over an extended period, America’s debt situation could spiral out of control.