Fitch Ratings on Friday said a debt-ceiling deal that will avert a first-ever federal default doesn’t guarantee the U.S. government will keep its AAA credit rating.
Fitch, in a statement, said the U.S. remained on rating watch negative “as we consider the full implications of the most recent brinkmanship episode and the outlook for medium-term fiscal and debt trajectories.”
Fitch put the U.S. on negative watch on May 24, citing concerns over the protracted debt-ceiling battle. The Senate late Thursday passed legislation to raise the debt ceiling, sending it to President Joe Biden for his signature. Biden was expected to sign the bill as early as Saturday and was slated to address the nation about the legislation Friday evening.
See also: Here’s how the debt-ceiling deal can hurt stock prices while disrupting the bond market
Treasury Secretary Janet Yellen had warned that the government could run out of the ability to pay its bills by Monday if the debt ceiling wasn’t raised. The debt-ceiling was raised after weeks of tense negotiations between the White House and congressional Republicans. The agreement keeps nondefense spending roughly flat in the 2024 fiscal year, increasing it by 1% the following year, and suspending the debt limit until January 2025.
“Reaching an agreement despite heated political partisanship while reducing fiscal deficits modestly over the next two years are positive considerations,” the ratings firm said. “However, Fitch believes that repeated political standoffs around the debt-limit and last-minute suspensions before the x-date (when the Treasury’s cash position and extraordinary measures are exhausted) lowers confidence in governance on fiscal and debt matters.”
Fitch said the U.S. rating is supported by “exceptional strengths,” including the size of the economy, high gross domestic product per capita and a “dynamic business environment.”
The U.S. dollar is the world’s pre-eminent reserve currency, which gives the government unparalleled financing flexibility, the firm said, but worried that “[s]ome of these strengths could be eroded over time by governance shortcomings.”
Fitch said it intended to resolve the negative watch in the third quarter of this year with the “coherence and credibility of policy-making, as well as the expected medium-term fiscal and debt trajectories” serving as key factors in its assessment.
Stock-market investors weren’t fazed by the warning, with the Dow Jones Industrial Average
DJIA,
jumping 701.19 points, or 2.1%, on Friday, while the S&P 500
SPX,
rallied 1.1% and the Nasdaq Composite
COMP,
advanced 1.1%.
Also read: The 60:40 portfolio is up more than 17%. Why is it doing so much better this year?
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