Economists doubt rationale of Fitch U.S. downgrade, but here’s why Fitch will be proven right a year from now

Economists and the financial community overall are mostly dubious over the timing and rationale of Fitch’s downgrade of the United States. Nevertheless, Fitch did get one thing right: fiscal policy machinations in Washington are a hot mess.

The image above shows what Fitch said about the political chaos that happens every time our government needs to make basic decisions.

Debt ceiling brinksmanship is a political tool disguised as fiscal policy.

We may come to see Fitch is right a year from now when the brinksmanship ahead of the next debt limit deadline becomes a central Election 2024 issue.

Washington’s supposed compromise to raise the debt limit this year included a provision to do this ‘raise the debt limit’ debate all over again before January 2025.

Nobody said much about this new January 2025 debt limit deadline when this year’s debt limit deal was made. But this date means fiscal chaos and brinksmanship will dominate market and Election 2024 narratives starting this time next year.

Aligning the next debt ceiling deadline with the next presidential election cycle is political dysfunction by design, and Fitch is right to point it out — or at least allude to it.

So a year from now when the debt ceiling debate starts raging again, market participants may reconsider their doubt about today’s Fitch move.

One last key note on this topic:

Treasury Secretary Janet Yellen strongly disagrees with the Fitch U.S. downgrade, saying:

The American economy remains the world’s largest and most dynamic economy, with the deepest and most liquid financial markets in the world.

Yellen is correct here, and this is why economists and market participants have been dubious.

But even Yellen has taken (albeit subtle) pokes at the messy, politicized fiscal policy approach in Congress.

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Reference:

– Read Fitch US Downgrade to ‘AA+’ from ‘AAA’

– Treasury Secretary Yellen responds to Fitch Rating