Fitch downgrades US credit rating citing rising debt and political divisions

WASHINGTON – Fitch Ratings has downgraded the US government’s credit rating, citing rising federal, state and local debt and a “steep deterioration in governance standards” over the past two decades.

On Tuesday, the rating was cut one step to AA+ from AAA, the highest possible rating. The new rating is still good investment grade.

The decision illustrates one way growing political polarization and repeated Washington standoffs over spending and taxes could end up costing American taxpayers. A lower credit rating can increase borrowing costs for the US government over time.

It is only the second time in the country’s history that its credit rating has been cut. In 2011, credit rating agency Standard & Poor’s stripped the USA of its AAA premium rating after a protracted battle over the government’s borrowing limit. The Government Accountability Office estimated in a 2012 report that the 2011 budget raised the Treasury’s borrowing costs by $1.3 billion that year.

At the same time, the sheer size of the US economy and the historic stability of the federal government have kept its borrowing costs low. Global investors often flock to U.S. Treasuries during periods of economic turmoil, which lowers the interest rate paid by the U.S. government.

Fitch had warned on May 24 that it could remove the government’s triple-A rating as Congress again struggled to raise the borrowing limit. A deal was reached nearly a week later that suspended the limit and cut about $1.5 trillion from the government deficit over the next decade.

Fitch cited the worsening political divisions over spending and tax policy as a key reason for his decision. It said U.S. governance has fallen relative to other highly rated countries, and it noted “repeated debt ceiling and last-minute decisions.”

Officials in the Biden administration strongly criticized Fitch’s move. Treasury Secretary Janet Yellen said it was “arbitrary” and “based on outdated data.”

Yellen noted that the US economy has quickly recovered from the pandemic recession, with the unemployment rate near a half-century low and the economy growing at a solid 2.4% annual rate in the April-June quarter.

Fitch informed Biden administration officials that the Jan. 6, 2021, uprising was a factor in its decision to downgrade because it indicated an unstable government, according to a person familiar with discussions between the administration and the rating agency. Fitch produced a report last year that showed government stability declined from 2018 to 2021 but increased since Biden assumed the presidency, said the person, who spoke on condition of anonymity to disclose private conversations.

Another factor in Fitch’s decision is that it expects the US economy to fall into a “mild recession” in the last three months of this year and early next year. Economists at the Federal Reserve made a similar forecast in the spring, but then reversed it in July, saying growth would slow but a recession was likely to be avoided.

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Associated Press Writers Josh Boak and Seung Min Kim contributed to this report.