Naturally, questions will arise over the timing of the rating action. Expectations of monetary tightening bringing the US economy to a standstill are receding. Doomsayers are in retreat, and Fitch finds itself under attack — from the administration and from independent observers. Standard & Poor’s, Moody’s and Fitch had warned the US its AAA credit rating was at risk. But only one has acted on it. This feeds scepticism over the downgrade. There is little new material evidence of the deterioration that Fitch documents since Congress arrived at its debt ceiling deal.
The dollar has strengthened after the downgrade; the US jobs market that is keeping private consumption aloft shows resilience. US unemployment is gradually yielding to the Fed’s quickest interest-rate tightening since the 1980s. But economic growth is also firming up. The Fed has not yet reached its terminal interest rate and further increases will keep strengthening the greenback. Borrowing costs for the US administration following the downgrade are unlikely to serve as a deterrent.
The projected debt build-up will require a new political agreement down the line. US treasuries will retain their pre-eminence among creditors across the world, as no other debt matches its safety. The Fitch downgrade draws attention to the contradiction of loose fiscal and tight monetary policy that is keeping the US economy from a hard landing. This aids the persistence of inflation making interest-rate movements sharper. The Fed’s actions have a bearing on the global economy that is battling an energy shock.
The markets have been injected with sobering reality. But the risk-off sentiment may be short-lived as a shallow US recession, if that, becomes more evident. But the US cannot keep kicking the fiscal can down the road.