Fitch announced Tuesday it has officially downgraded the United States' long-term foreign-currency issuer default rating to "AA+" from "AAA," saying the downgrade "reflects the expected fiscal deterioration" and the nation's heavy debt burden.
The ratings agency pointed the America's "erosion of governance," rising deficits, and tightening by the Federal Reserve. It also said its expects the U.S. economy to slip into a mild recession in the fourth quarter.
U.S. Treasury Secretary Janet Yellen issued a statement pushing back on Fitch's move, saying the rating agency was using old data and arguing conditions have improved under the Biden administration.
"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 "The change by Fitch Ratings announced today is arbitrary and based on outdated data."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," she continued. "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."
Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in the debt capital markets. Generally, the lower a borrower's rating, the higher its financing costs.
The agency also said it expects the US federal deficit to grow from 3.7% of GDP in 2022, to 6.3% of GDP in 2023.
Reuters contributed to this report.