This year’s $6.5 trillion rally in stocks hit a wall, following hot labor-market data and a ramp-up in Treasury issuance just a day after a US credit downgrade by Fitch Ratings.
As a result, Wall Street finished lower on Wednesday, with the S&P 500 and Nasdaq Composite down for a second straight day as investors took profits on five months of gains a day after rating agency Fitch cut the U.S. government’s credit rating.
Fitch downgraded the United States to AA+ from AAA late on Tuesday, citing expected fiscal deterioration over the next three years as well as growing government debt. Fitch was the second major agency to cut the country’s rating. In 2011 Standard & Poor’s stripped the country of its triple-A grade.
Pushing back hours before her department is set to ramp up its borrowing to plug a ballooning budget deficit, Treasury Secretary Janet Yellen called the downgrade “arbitrary” and “outdated.” The economy has recently shown signs of resilience and the debt limit was ultimately lifted, she noted.
The US budget deficit surged to record levels when the government spent heavily to support households and businesses as Covid shut down the economy. It shrank last year, but now it’s widening again. The federal deficit hit $1.4 trillion for the first nine months of the current fiscal year, almost triple the year-earlier figure. The US Treasury this week boosted its borrowing forecast for the current quarter to $1 trillion, well above the $733 billion it had predicted in May.
Fitch’s downgrade is a signal that the US needs to get its budgetary process in order ahead of what looks like another political fight this fall, and possibly another government shutdown.
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