Joe Biden Given 'Wake-Up Call' by Fitch Credit Downgrade Over U.S. Economy

The decision by rating agency Fitch to downgrade the United States' credit rating is a "wake-up call" for President Joe Biden's administration, according to the non-partisan Committee for a Responsible Federal Budget.

Maya MacGuineas, chair of the non-profit organization, made the remarks following Fitch Ratings' decision to downgrade its credit rating for the U.S. from AAA to AA+.

Biden administration officials responded to the move with apparent surprise and anger, with one unnamed senior official describing the downgrade as "bizarre and baseless" on a call with reporters.

"Today's downgrade should be a wake-up call," MacGuineas said. "Whether one agrees with Fitch's decision to downgrade the United States government or not, we are clearly on an unsustainable fiscal path. We need to do better."

Newsweek reached out to the White House via email for comment.

The credit downgrade by Fitch moves the U.S. from the highest rating, AAA, down one notch. While this is still considered a very positive indicator of a country's creditworthiness, it is only the second-highest rating.

The lowest rating is D, which indicates that the country "has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure or that has otherwise ceased business."

An 'Arbitrary' Decision

Treasury Secretary Janet Yellen issued a statement moments after Fitch announced the credit downgrade and called the move "arbitrary."

"I strongly disagree with Fitch Ratings' decision," Yellen's statement said. "The change by Fitch Ratings announced today is arbitrary and based on outdated data. Fitch's quantitative ratings model declined markedly between 2018 and 2020 – and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its decision.

"Many of these measures, including those related to governance, have shown improvement over the course of this Administration, with the passage of bipartisan legislation to address the debt limit, invest in infrastructure, and make other investments in America's competitiveness," the statement said.

In its statement on Monday, Fitch, one of the three major ratings agencies that assess the creditworthiness of governments, cited "a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025."

In June, the U.S. national debt ceiling was suspended following a bipartisan agreement. The move was approved by the House of Representatives and the Senate. It is necessary to raise or suspend the federal debt limit—also known as the debt ceiling—so the U.S. can pay for spending already authorized by Congress and the president.

The debt limit was suspended rather than raised to a specific level. The agreement also means that the debt ceiling will not be revisited until 2025.

One senior administration official told reporters: "This is a bizarre and baseless decision for Fitch to make now," Reuters reported.

Bidenomics

Fitch announced the downgrade at a time when the Biden administration has seen some good economic news and amid efforts to promote so-called "Bidenomics," the president's economic plan.

The annualized rate of inflation in the U.S. fell to just 3 percent in June, approaching the Federal Reserve's 2 percent target and significantly lower than the record-high rates of inflation last year. The Fed has been seeking to lower inflation through interest rate hikes.

In June 2022, the annualized rate of inflation was 9.1 percent.

The decision to suspend the debt limit until 2025 was also seen as a win for the Biden administration as it successfully avoided a possible default on U.S. national debt.

Thomas Gift, founding director of the Centre on U.S. Politics at University College London, U.K., told Newsweek that Fitch's decision will not be welcomed by the Biden administration.

"The U.S. credit downgrade certainly isn't the news that the White House would be hoping for," Gift said. "While a strong stock market and withering inflation has made 'Bidenomics' less of a pejorative term than it was even a few months ago, any hit to the economy is going to negatively impact the administration.

"Of course, it would be wrong to place the blame solely on the shoulders of Democrats. Mounting concerns about America's creditworthiness are an inevitable byproduct of broader dysfunction in Washington," Gift said. "For evidence, look no further than the hyper-polarization a few months ago that almost pushed the U.S. over a fiscal cliff in the wake of the debt ceiling debate."