Yellen slams 'entirely unwarranted' decision to downgrade US credit rating

Treasury Secretary accuses agency of using outdated data after it knocked credit rating down to AA+

US Treasury Secretary Janet Yellen. AFP
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Treasury Secretary Janet Yellen said she strongly disagreed with Fitch's decision to downgrade America's perfect credit rating, saying the agency made the announcement using outdated data.

The agency cut the US from its pristine AAA rating by one level to AA+ on Tuesday. Factors included the nation's growing debt burden, expected fiscal deterioration over the next three years and “the erosion of governance”.

But the timing of the decision was questioned, after recent data showed a resilient economy. Government reports have shown continued disinflation while gross domestic product growth blew past expectations in the second quarter of this year.

“Fitch's decision is puzzling in light of the economic strength we see in the US,” Ms Yellen told reporters at an event in McLean, Virginia.

“I strongly disagree with fitch's decision and believe it is entirely unwarranted.”

Ms Yellen also remained confident that the US continues to hold the “strongest financial system in the world” as it continues to recover from the doldrums of the Covid-19 pandemic.

She also criticised Fitch's “flawed” assessment for failing to reflect on the updated improvements on the US economy, including that which related to governance.

“Despite the gridlock, we've seen both parties come together to pass legislation, to resolve the debt limit as well as make historic investments in American infrastructure and competitiveness,” she said.

Recent economic data has led to economists showing a sunnier disposition towards the economy, evidenced by new forecasts that the US is on track to avoid a recession.

“It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world,” White House Press Secretary Karine Jean-Pierre said.

The White House said Fitch's decision was based on data from before President Joe Biden took office.

Investors use credit ratings as a benchmark for judging how risky it is to lend money to a government.

US Treasury yields changed little on Wednesday as traders weighed the decision by Fitch.

The US was put on negative credit watch by Fitch earlier this year over a debt ceiling standoff between the White House and Republican leadership.

A last-minute deal was struck to avert an economic catastrophe, but the credit agency remained wary of political divides.

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch said.

Fitch also projects the US debt burden to balloon to 118.4 per cent of GDP by 2025. The average 'AAA' median is 39.3 per cent of GDP.

As the debt-to-GDP ratio rises, so too will the vulnerability of the US to future economic shocks, according to the rating agency.

Fitch's downgrade comes 11 years after S&P had downgraded US's perfect rating.

Updated: August 02, 2023, 7:56 PM