The credit rating of the US government has reportedly been downgraded from AAA to AA+ by Fitch, one of the leading credit rating agencies. Fitch cited concerns about the country's financial situation and increasing debt burden, indicating a "steady deterioration" in governance over the past two decades.

US Treasury Secretary Janet Yellen responded to the downgrade, dismissing it as "arbitrary" and based on outdated data from 2018 to 2020. She emphasized that US Treasury securities remain a top safe & liquid asset, and the American economy is fundamentally strong.

The downgrade comes amid political disagreements over government borrowing, with a prolonged battle to raise the debt ceiling earlier this year. Although the government managed to lift the debt ceiling to $31.4 trillion, lawmakers will need to work on reaching a budget agreement by the end of September to avoid a government shutdown.

Fitch stated that the rating downgrade sheds light on the predicted fiscal deterioration in the upcoming three years, the growing government debt burden, and the decline in governance compared to other countries. However, some economists were surprised by the timing and rationale of the downgrade, as the US economy appeared stronger than expected.

Former US Treasury Secretary Larry Summers and the chief economic advisor at Allianz, Mohamed El-Erian, criticized Fitch's decision as "bizarre" and "strange," respectively. They believed the announcement would likely have little lasting impact on the US economy and markets.

Fitch also predicted that the US might face a mild recession later this year. Still, Nobel Prize-winning economist Paul Krugman highlighted the success in controlling inflation without a recession as the most significant economic news in the past year.

While some experts questioned the timing of Fitch's announcement, it is unlikely to have a direct impact on financial markets as major holders of Treasury securities are not expected to be forced to sell based on the ratings change, according to Alec Phillips, chief US political economist at Goldman Sachs. Former economic adviser to President Barack Obama, Jason Furman, also called the downgrade "completely absurd."

Source: https://www.bbc.com/news/business-66379366