While the deal to raise the debt ceiling and cut spending are “positive considerations,” Fitch said “repeated political standoffs' over the federal government's borrowing limit 'lowers confidence in governance on fiscal and debt matters.”
Treasury securities are the lifeblood of financial markets and a benchmark for how everything from municipal debt to credit card rates are priced. A downgrade, which would mark only the second time a ratings service has knocked U.S. bonds from top-tier status, could drive up borrowing costs for consumers, businesses and governments — tightening credit conditions at a time when the economy is already at risk of recession.
That would make for tough political headwinds for Biden, House Speaker Kevin McCarthy and other 2024 incumbents who waited until the U.S. was days away from default before agreeing to a deal. A similar dynamic influenced S&P’s decision to downgrade the U.S. credit rating in 2011 even after President Barack Obama and Republican leaders averted a debt-limit disaster.
So far, the economy has shown surprising resilience despite stubbornly high inflation and a rapid series of interest rate hikes shepherded by Federal Reserve Chair Jerome Powell. But U.S. policymakers have risked damaging the economy’s otherwise strong fundamentals thanks to “a steady deterioration in governance over the last 15 years,” according to Fitch’s statement.
“Increased political polarization and partisanship as witnessed by the contested 2020 election, repeated brinkmanship over the debt limit and failure to tackle fiscal challenges from growing mandatory spending has led to rising fiscal deficits and debt burden,” the ratings service said.
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