America's credit score got slashed – but that's not the economic disaster it sounds like
- Ratings agency Fitch cut America's credit score in a surprise move Tuesday.
- That might sound bad – but the decision doesn't mean anything much for the economy.
Fitch's surprise downgrade of the US's credit score Tuesday might sound like a disaster for the economy and a blow for Joe Biden.
The ratings agency said that political polarization in Washington DC has eroded its faith in the government's ability to repay its debts, which now stand at a massive $31.4 trillion and are expected to balloon by another $1 trillion in the third quarter of 2023 alone.
Biden administration officials responded by going on the warpath, with Treasury Secretary Janet Yellen slamming Fitch's guidance as "arbitrary and based on outdated data" and "puzzling in light of the economic strength we see in the United States".
She's right. Fitch's downgrade is like an individual's credit score slipping from exceptional to merely very good.
Its "AA+" assessment means the US is still on par with Canada and above the UK and France. And Fitch's argument that the US has suffered a "steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters" is hardly new news.
Anyone who's followed American politics since 2016 knows the gap between the Democrats and Republicans is widening, but that Biden and House leader Kevin McCarthy still reached a last-minute debt-ceiling deal to stop a catastrophic default two months ago.
The debt-rating cut also shouldn't distract from all the economic optimism of the past few months – with second-quarter growth coming in above forecasters' expectations, inflation steadily cooling, and unemployment holding steady at under 4%.
Big Wall Street names such as Bank of America have reversed their recession forecasts in response to that data, echoing the Federal Reserve's call that the US is unlikely to suffer a long-predicted economic slump this year.
If you need more convincing that Fitch's downgrade is no big deal, look no further than the stock market.
When fellow "Big Three" agency S&P Global cut its own rating for the US in 2011, the S&P 500 crashed 6.5% in a single day and took six months to recover those losses.
On Wednesday, the index slipped just 1%, and investors didn't rush to the "safe haven" assets they usually turn to in a crisis, with 10-year Treasury yields and a popular gauge of dollar strength only edging up slightly.
In other words, Fitch slashed the US's credit score, and Wall Street shrugged.
Far from an economic catastrophe, the ratings agency's downgrade is the most minor of setbacks – and shouldn't outweigh all the good news from the past few months.