Credit downgrade for U.S government threatens to put the squeeze on Washington and the average Joe

Fitch Ratings’ downgrade of the federal government’s credit rating is not just an embarrassing black eye for Washington; it also will hit the government — and possibly average Americans — in the wallet, economists say.

Fitch dropped the long-term foreign currency issuer default rating to AA+, a step down from the top-tier AAA rating, for only the second time in history.

Although the rating is still highly favorable, the drop could downgrade bonds and increase interest rates, said Chris Edwards, an economist at the Cato Institute. He said that could eventually lead to a debt “death spiral.”

“It’s a big sign that Washington needs to cut spending elsewhere,” Mr. Edwards told The Washington Times. “It’s going to drive the American economy to the poor house.”

Ralph Sonenshine, an economics professor at American University, said the drop from an AAA rating to AA+ is “minimal” but is a warning sign to heed. He said further downgrades could lead to a debt squeeze that could reach American households.

“The cost of borrowing is going up,” Mr. Sonenshine said. “So when you’re buying something on credit, whether it’s a car, for example, a new home, that just makes it more expensive.”

After S&P Global Ratings downgraded the U.S. credit rating in 2011, the stock market gradually dropped by 17%, Mr. Sonenshine said.

So far, the stock market has been mildly impacted by Fitch’s move. The S&P 500 dropped by 1.45%, and the Dow Jones Industrial Average dropped by 0.99% Wednesday.

Fitch Ratings cited a “steady deterioration in standards of governance” over the past two decades as a reason for the rating cut.

Richard Francis, co-head of Fitch Ratings, said the bigger issue was Republican and Democratic brinkmanship in Washington’s squabbles over the debt ceiling.

Mr. Francis noted that neither party could develop long-term solutions for looming fiscal issues surrounding entitlement programs such as Social Security and Medicare.

“I think these are the type of things that highlight the importance of government, and also the inability of the government and both parties to come up with some kind of solution,” Mr. Francis told CNBC.

In its announcement of the downgrade, Fitch said the federal deficit is rising, spending is growing, tax revenue is slipping and efforts to trim the debt have been too timid.

Fitch bucked other analysts to suggest that the economy will slip into “a mild recession” at the end of this year.

Phil Kerpen, president of the conservative nonprofit economic think tank American Commitment, called the downgrade “mostly meaningless.”

“I think Fitch was playing politics and trying to give a political weapon to Democrats, but I’m not sure that it gives them any more ammunition than they already had. I don’t think it has any great effect,” Mr. Kerpen told The Times.

Of the three top ratings agencies, only Moody’s has the U.S. still at AAA.

Democrats and Republicans traded blame for the downgrade.

President Biden’s team said Fitch’s data showed that the U.S. position deteriorated during the Trump administration and improved slightly in the past couple of years.

Treasury Secretary Janet Yellen called Fitch’s move “puzzling.”

“I strongly disagree with Fitch’s decision, and I believe it is entirely unwarranted,” she said Wednesday. “Its flawed assessment is based on outdated data and fails to reflect improvements across a range of indicators, including those related to governance, that we’ve seen over the past two and a half years.”

Republicans said the downgrade is a black eye for Mr. Biden’s economic stewardship.

House Ways and Means Committee Chairman Jason Smith, Missouri Republican, pointed out that Mr. Biden was in the White House during the 2011 downgrade. As vice president, he oversaw President Obama’s stimulus spending.

“Now families and small businesses already dealing with soaring interest rates and lost wages from Biden’s inflation crisis will also have to face the consequences of a reduced confidence in America’s sovereign debt,” Mr. Smith said.