On August 1, 2023, Fitch Ratings, one of the country’s three major credit rating agencies, announced that it had downgraded the US credit rating from AAA to AA+. Fitch had been reassessing the nation’s creditworthiness over the last two months, putting the US on negative watch in May 2023.
In their risk assessment, Fitch cited the expected fiscal deterioration of the US government over the next three years, growing national debt, and the erosion in standards of governance over the last 20 years as reasons behind the downgrade.
The Treasury Department strongly opposes this decision to downgrade the US credit rating.
What is the US credit rating?
The US credit rating refers to the assessment of the creditworthiness of the US government’s debt obligations assigned by credit rating agencies. The rating indicates the likelihood that the government will repay its debts in a timely manner.
The rating system is expressed through letter grades; higher grades represent lower credit risk and better creditworthiness. However, this grading system varies depending on the credit rating agency’s preferred method.
How is the US credit rating different from a consumer credit rating?
The US credit rating is distinct from consumer credit ratings, which pertain to the creditworthiness and default risk of individuals.
Consumer credit scores, which typically range from around 300 to 850, are based on an individual’s credit history, including their past borrowing, repayment behavior, outstanding debt, and other metrics calculated by credit bureaus.
While both ratings aim to assess creditworthiness and have financial implications for lenders, investors, and consumers, they are separate in their focus and scope. The US credit rating system is more appropriate for macroeconomic indicators, while consumer credit ratings only apply to specific individuals’ financial situations.
What does the US credit downgrade mean for the economy?
The US credit rating score, and its recent downgrade, can reflect the fiscal stability of the government.
The US credit rating could potentially impact interest rates for government securities, which global investors consider a safe-haven asset.[1] Following the first downgrade of the US credit rating in 2011 by Standard and Poor (S&P), interest rates for US securities dropped.[2]
Secretary of the Treasury Janet Yellen has disapproved of Fitch’s decision, calling it “arbitrary and based on outdated data.” Yellen also cited the country’s low unemployment rates, slowing inflation, and commitment towards deficit reduction as proof that “Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong.”
What’s the history of the US credit rating?
The US credit rating had a comparable downgrade in August 2011 when the S&P lowered its rating from AAA to AA+. This was the first downgrade in the nation’s history.[3]
The downgrade followed congressional debates regarding measures to reduce the national debt and raising the debt ceiling — an ongoing issue that continues to impact government fiscal policy and was one of the contributing factors to the recent downgrade by Fitch.
Despite the S&P downgrade, and its immediate impact on yield curve rates, the public continued to purchase US government securities.
What are the current US credit ratings?
As of August 2023, the US economy has separate ratings from the three most prominent credit rating agencies. Fitch’s rating is currently AA+.
Standard and Poor maintains a credit rating of AA+ for the US, which it last downgraded in 2011.
And finally, Moody Investment Services’ credit rating for the US is Aaa with a stable outlook.
What factors affect the US credit rating?
In their statements on credit rating criteria, Moody and S&P have listed economy, social, and political factors that underlie the US credit rating. While these agencies provide little guidance as to the weight they assign to certain factors, there are some key determinants which distinguish the strength of a credit rating.
Some variables, as tested by the New York Federal Reserve, include such as per capita income, GDP growth, inflation, the nation’s fiscal balance, external balance, and other indicators related to the risk of default and progress in economic development.
In addition to other factors Fitch cited in its US credit rating, the agency specifically noted rising government deficits at the federal, state, and local levels.
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[1] Safe-haven refers to the fact that the investment has a relatively low risk of failure even during times of economic uncertainty.
[2] However, there is no government data proving this relationship to be causal.
[3] The US credit rating has been downgraded by other credit agencies besides the “Big Three” credit rating agencies of Moody Investment Services, Standard and Poor, and Fitch Ratings, since 2011.
