Economists express bewilderment at Fitch’s ‘peculiar’ U.S. credit downgrade

**Fitch Ratings Downgrades U.S. Government Debt, Citing Erosion of Governance and Budget Deficit**
Fitch Ratings has downgraded the United States’ government debt from its highest rating, AAA, to AA+. The downgrade comes as a result of an “erosion of governance” and a booming federal budget deficit. Fitch highlights the country’s expected fiscal deterioration over the next three years, a growing debt burden, and a decline in governance relative to other highly rated nations. The current U.S. national debt stands at $32.67 trillion, and Fitch predicts that it will continue to rise in the coming years due to rising social security and Medicare costs resulting from an aging population. By 2025, the agency expects the U.S. national debt burden to reach 118% of gross domestic product, compared to around 39% for AAA-rated nations.

**Concerns over Repeated Debt Limit Standoffs and Last-Minute Resolutions**
Fitch’s downgrade follows the U.S. Treasury Department’s announcement on Monday that it has increased its net borrowing estimate for the third quarter to $1 trillion. The credit rating change was not unexpected, as Fitch had previously placed the U.S.’s AAA credit rating on “negative watch” in May. Lawmakers faced a race against time to secure funding for the U.S. government after reaching the $32 trillion debt ceiling. The debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management, according to Fitch. The ratings agency also warns that tighter credit conditions, paired with slowing consumer spending, could lead to a “mild” recession in the U.S. this year or early next year.

**Reaction from Economists**
Economists have criticized Fitch’s decision to downgrade U.S. government debt, arguing that recent economic data, such as low unemployment figures and steady GDP growth, demonstrate an improving situation in the country. Former Treasury Secretary Larry Summers called the decision “bizarre and inept” and dismissed the idea that the U.S. is at risk of defaulting on its debts as “absurd.” Other economists, such as Mohamed El-Erian, questioned the timing of the downgrade, given the recent strength of the U.S. economy. Treasury Secretary Janet Yellen also responded to the rating decision, calling it “arbitrary” and “based on outdated data.”

**Market Impact and Expert Opinions**
The news of Fitch’s downgrade led to a decline in stocks on Wednesday, with the S&P 500 falling 1.38% and the Nasdaq Composite dropping 2.17%. Despite this, top economists and strategists on Wall Street do not seem concerned. Goldman Sachs’ chief U.S. political economist, Alec Phillips, stated that the downgrade should have little direct impact on financial markets. Lauren DiCola from Certuity, a wealth management firm, also believes that the decision is unlikely to affect buyers of U.S. Treasurys or cause forced selling. However, she acknowledges that the downgrade highlights the U.S.’s persistent issue with deficit spending. Some experts, like Quincy Krosby from LPL Financial, warn that if the deficit is not contained, taxes may need to be raised, resulting in less discretionary income for consumers. Krosby also notes that as the U.S. government takes on more debt, Treasury yields may need to rise significantly to attract investors, potentially impacting the equity market.

In conclusion, Fitch Ratings has downgraded the U.S. government debt from AAA to AA+ due to concerns about governance erosion and the growing budget deficit. Economists have expressed skepticism about the downgrade, pointing to positive economic data, while market experts believe it will have little direct impact. However, the downgrade does bring attention to the U.S.’s ongoing issue with deficit spending and the potential long-term consequences if it is not addressed.

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