Treasury Secretary Janet Yellen doubled down on her criticism of Fitch’s downgrade of the U.S. government’s long-term credit rating in remarks on Wednesday.
Fitch Ratings announced the downgrade on Tuesday, which dropped the U.S. credit rating by one notch from its highest rating ‘AAA’ to ‘AA+’ citing an "erosion of governance" that has manifested itself in repeated debt limit standoffs. Fitch also sees federal deficits widening and exacerbating an already large national debt, looming fiscal challenges posed by rising spending on Social Security and Medicare, in addition to a mild recession projected in late 2023 and early 2024.
Yellen pushed back on the downgrade, arguing that the U.S. economy "continues to grow" and added, "In the longer term, the United States remains the world’s largest, most dynamic, and most innovative economy – with the strongest financial system in the world."
"Fitch’s decision is puzzling in light of the economic strength we see in the United States. I strongly disagree with Fitch’s decision, and I believe it is entirely unwarranted," Yellen said. "Its flawed assessment is based on outdated data and fails to reflect improvements across a range of indicators, including those related to governance, that we’ve seen over the past two and a half years."
"Despite the gridlock, we have seen both parties come together to pass legislation to resolve the debt limit, as well as to make historic investments in our infrastructure and American competitiveness," Yellen added.
Investors use credit ratings to assess the risk profile of companies and governments when they raise funding by issuing debt in capital markets. Generally, the lower a borrower’s rating, the higher its financing cost – which is reflected in relatively higher interest rates.
In announcing the downgrade, Fitch spotlighted several aspects of the U.S. that support keeping its credit rating relatively high – including the dollar’s status as the world’s leading reserve currency.
"Several structural strengths underpin the United States’ ratings. These include its large, advanced, well-diversified and high-income economy, supported by a dynamic business environment. Critically, the U.S. dollar is the world’s preeminent reserve currency, which gives the government extraordinary financing flexibility," Fitch wrote.
America’s credit rating was downgraded for the first time in 2011 following a debt ceiling standoff that was eventually resolved with a compromise on automatic spending cuts known as "sequestration."
At the time, Standard & Poor’s cut the rating from ‘AAA’ (outstanding) to ‘AA+’ (excellent), although Fitch and Moody’s kept the U.S. at ‘AAA’ at the time.
FOX Business’ Breck Dumas contributed to this report.