Fitch cites Jan. 6 riot in US credit downgrade

U.S. political instability reflected in the Jan. 6, 2021, insurrection at the Capitol was a factor in the downgrading of U.S. debt by Fitch, an official for the ratings agency told Reuters.

Equity markets dipped Wednesday morning following the downgrade.

The Dow Jones Industrial Average of major U.S. stocks was down more than 200 points, or 0.62 percent, the S&P 500 index fell more than 42 points, or 0.92 percent, and the technology-heavy Nasdaq index fell more than 220 points, losing more than 1.5 percent of its value in early trading.

Assistant Treasury Secretary for Financial Markets Josh Frost told reporters that he wasn’t concerned about the Fitch downgrade and was seeing minimal pricing effects in markets.

“I could just point to what we’re seeing in the immediate response, which is a very limited price response in markets,” he said Wednesday.

A number of analysts and market commentators also blasted Fitch for its decision, noting a similar downgrade in 2011 made by the Standard & Poor’s rating agency

“Almost 12 years ago to the day (on August 5, 2011) [like] when S&P pulled the same nonsense, this will matter to no one and be forgotten in days. A nation that prints its own currency cannot default on its debt, politics notwithstanding,” Westwood Capital managing partner Dan Alpert wrote online Wednesday.

Stony Brook University professor and economist Stephanie Kelton said the downgrade amounted to a “blow to Fitch Ratings’ reputation.”

Fitch cited other factors in its decision to downgrade the reliability of U.S. debt, including the level and trajectory of the federal deficit, the increasing interest service burden due to the Fed’s push to raise interest rates, and the possibility of a recession.

Amid macroeconomic conditions that have upended long-held assumptions about how the U.S. political economy works, contradictions and disagreements about where the economy is currently heading are proliferating.

The Fed predicted a “mild recession” later this year in March before yanking that prediction at its last rate setting committee meeting.

While Fitch is still predicting a “mild recession” to appear in the fourth quarter of this year, Moody’s Analytics economist Mark Zandi told The Hill in an interview he doesn’t think the economy will experience one.

“We should be able to skirt a recession. Barring a policy error or something unforeseen, we should be able to avoid a downturn,” he said Wednesday. “The economy is hanging tough.”

“We’ve had many Treasury debt limit dramas over the years,” Zandi added. “As far as this one goes, it was relatively benign. At the end of the day, they came to terms and markets barely reacted.”

Zandi endorsed a long-proposed rule change to avoid debt ceiling standoffs in the future, in which deficit-increasing legislation as scored by the Congressional Budget Office (CBO) would be commensurately accompanied by a debt ceiling increase.

Updated at 1:20 p.m.