Fitch move spotlights US debt risk as recession fear fades

economictimes.indiatimes.com:

Fitch Ratings to downgrade US government credit has put a renewed focus on the nation’s debt trajectory, just when the world’s largest economy is shaking off forecasts for a looming recession. In the past week, Chairman Jerome Powell said the Federal Reserve is no longer expecting a US downturn, even after the most aggressive interest rate hikes in decades, and economists at Bank of America Corp. also scrapped their recession forecast.

Evidence of enduring strength among consumers and businesses keeps coming in: Data released Wednesday showed US companies added more jobs in July than expected. That’s all a stark contrast to 2011, when S&P Global Ratings stripped the US of its AAA rating. Back then, the economy was hauling itself out of the global financial crisis and unemployment was around 9%.

It’s now at 3.6%, near the lowest level in decades. The decision by Fitch to lower the US sovereign credit grade one level from AAA to AA+ highlights the debt pile that the US has built up in recent years, largely due to pandemic stimulus as well as tax cuts. More recently, the government has also launched investment programs for infrastructure, technology and clean energy.

Meanwhile the cost of borrowing has soared as the Fed pushed interest rates to a 22-year high. Fitch forecasts US debt to reach 118% of gross domestic product by 2025, about three times higher than the median of 39% among countries awarded the top-of-the-class AAA rating. It projects that the ratio will rise even higher in the longer term.