If there’s one thing that the financial markets dislike, it’s uncertainty. Unfortunately, there’s a whole lot of uncertainty in the U.S. in recent years. With the pandemic, political turmoil, and ever-pressing fears of a recession tied to high levels of inflation, it’s easy to see why an outside observer may look at the U.S. economy and feel that things are a bit shaky.
That’s the primary reason that the U.S. saw its credit rating downgraded in recent weeks.
Fitch Ratings, which is one of the world’s top credit-rating agencies, downgraded the U.S. government’s credit rating to AA+ from AAA, largely due to the reasons outlined. A lot of it has to do with the ongoing fights in the government over debt ceilings, but it’s a pretty big deal because it just doesn’t happen very often.
Here’s exactly what Fitch said about the downgrade:
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.”
While this isn’t necessarily a good thing, it’s also not a sky-is-falling type of thing, either. Essentially, what this means is that rating agencies are looking at the U.S. government a little more closely than before. In years past, the U.S. has had an ironclad rating, and has been more or less perfect in its ability to pay back debt. This rating change means that there still isn’t really a problem, but that things are a tad more suspect than before.
To further understand the U.S. credit rating, it may be easiest to think about things in terms of an individual’s credit score. You know how credit scores work — we at Money Vehicle like to call them your “financial reputation.” A credit rating, as it relates to a government, is a lot like that. When the U.S. government’s credit rating takes a hit, it’s similar to seeing your credit score drop a few points.
So, instead of having “great” credit, it may be akin to the U.S. now having “very good” credit.
By and large, though, the credit rating decline is something of a shot across the bow for regulators and policymakers. The turmoil in our government is not going unnoticed and as the U.S. government continues to go further into debt, this could become an even bigger problem in the years ahead. But there are no guarantees — the credit rating may get bumped back up to AAA again at some point, too.
It’s also worth noting that the day the downgrade hit the news wires, the markets reacted poorly. The Nasdaq lost more than 2%, and the S&P 500 lost nearly 1.4% as investors digested the news. Again, this may not have a super deep impact on individuals, but knowing what the credit rating decrease is, why it happened, and how it’s being taken by the markets can be helpful to almost everyone.
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