For the second time in U.S. history, Fitch Ratings has downgraded the nation's credit rating, signaling potential repercussions for both the national economy and individual finances if U.S. debt continues to escalate, experts say.
The credit rating of the U.S. has been reduced to AA+ from AAA by Fitch Ratings, prompted by the growing U.S. debt and a perceived weakening of governance. Furthermore, Fitch anticipates the U.S. may face a recession later this year.
This downgrade follows a period of federal deadlock that postponed a debt-ceiling resolution until just days before the U.S. was predicted to lose its capacity to service outstanding financial obligations.
While experts minimize the immediate economic impact of the rating decision, they acknowledge it as a significant landmark on a trajectory of escalating debt. This could ultimately heighten the nation's borrowing costs, jeopardize economic growth, and increase interest rates for consumer loans such as credit cards and mortgages.
U.S. Treasury Secretary Janet Yellen expressed her disapproval of Fitch's decision in a statement on Tuesday.
"Despite Fitch's decision, the fact remains that Treasury securities are still the world's foremost safe and liquid asset, and the American economy remains robust at its core," Yellen stated.
Here's an insight into what this credit rating decision could mean for the economy and personal finances:
Implications for the Economy
Credit rating decisions like Fitch's are essentially based on a country's ability to manage its escalating debt.
As federal government spending surpasses tax revenue on an annual basis, the U.S. has amassed debt in the tens of trillions, obliging the country to maintain consistent payments to avoid defaulting on loans.
The downgrade in credit rating is part of a series of events that could potentially make investors wary about the U.S.'s ability to repay its debt. This could lead to higher interest rates for loans, making U.S. debt more expensive.
The federal government's capacity to fund social welfare initiatives and economy-boosting projects could be compromised, which might lead to slower economic growth and increase susceptibility to financial challenges, according to Shai Akabas, the director of economic policy at the Bipartisan Policy Center.
"The greater the debt and the higher the interest rates, the more our federal taxes will be consumed by interest payments, which do not create economic value or provide support for Americans," Akabas stated.
For now, experts suggest the rating change does not significantly impact the esteemed status of U.S. Treasury bonds, the financial tool that enables the country to borrow money in exchange for an agreement to repay lenders with interest.
Impact on Everyday Finances
The possible financial implications for individuals, like the economic threat, are likely to be more long-term than immediate, experts suggest.
If U.S. debt continues to balloon and the government struggles to manage it, consumers may face higher interest rates as the country and its borrowers are seen as less reliable. This translates to more expensive borrowing for everything from credit cards to mortgages to automobiles.
The stock market reacted immediately to the rating decision with a decline in afternoon trading on Wednesday. The tech-centric Nasdaq fell nearly 2%; while the S&P 500 dropped more than 1%.
However, Tigress Financial market analyst Ivan Feinseth considers the stock downturn as a short-term hiccup given the solid fundamental economic conditions amid declining inflation and job growth.
Feinseth stated, "The market's reaction is even more absurd than the downgrade. This presents a prime opportunity to purchase stocks."