Shock U.S. Credit Rating Downgrade by Fitch Rings Alarm Bells About Economy

Fitch Ratings' surprise downgrade of the U.S. long-term credit rating from AAA to AA+ on Tuesday has angered the White House and the Treasury, with Secretary Janet Yellen calling the decision "arbitrary and based on outdated data."

While the decision comes after the Biden administration managed to resolve the debt ceiling crisis and inflation has now consistently been coming down for months, the international credit rating agency cited specific concerns it has over the future of the U.S. economy, the country's growing debt, and an incoming recession.

In a statement announcing the downgrade, the company wrote: "In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025."

According to the company, despite the fact that the debt ceiling standoff was resolved two months ago, "the repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management."

Fitch—one of the biggest rating firms in the world along with Moody's and S&P—also cast doubt over the government's lack of a "medium-term fiscal framework" and an increased debt burden.

"The government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process," Fitch wrote.

"These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade. Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population."

Fitch expects that the U.S. economy will slip into a mild recession in the last quarter of the year and the first quarter of 2024, with the country's annual GDP growth slowing to 1.2 percent this year from 2.1 percent in 2022. Next year, it expects a growth of just 0.5 percent.

The rating firm had previously mentioned the possibility of a downgrade in May but reconsidered the move in June. The U.S. was stripped of its top credit rating in 2011 by S&P.

Yellen's disappointment at Fitch's decision was mirrored by the White House, which said it "strongly disagrees with this decision."

"The ratings model used by Fitch declined under President Trump and then improved under President Biden, and it defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world," said White House press secretary Karine Jean-Pierre in a statement released on Tuesday.

"And 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."

Newsweek has contacted Moody's, S&P Global, and Fitch Ratings for comment by email on Wednesday.