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Treasury officials report little fallout after the government's credit rating drop

SACHA PFEIFFER, HOST:

For generations, the U.S. government has been seen as a very trustworthy borrower, but that reputation got a black eye this week. The Fitch bond rating agency stripped the government of its AAA credit rating. And that caused minor tremors in the stock market today, although officials say the overall fallout should be limited. NPR's Scott Horsley is here to talk through the implications. Hi, Scott.

SCOTT HORSLEY, BYLINE: Hi, Sacha.

PFEIFFER: At a minimum, this is a symbolic blow for the government's finances. Explain to us why Fitch took this action now.

HORSLEY: Yeah. Fitch was motivated by a combination of big government deficits and political gridlock. The rating agency notes that the government's now carrying about $32 trillion in debt. Relative to the size of the U.S. economy, that's almost three times what the average AAA-rated country owes. What's more, there's not much sign of any improvement on the horizon. Richard Francis, who helped conduct this analysis for Fitch, points to the recent deal the Biden administration struck with House Republicans to temporarily raise the debt ceiling. That deal did impose some modest limits on spending, but it didn't really address the country's big, longer-term fiscal challenges.

RICHARD FRANCIS: To really tackle the issues, you're going to have to look at some of the other big elephants in the room - whether it's raising taxes or somehow reforming entitlement programs. There's a number of ways you can do it. It's just - I don't get a sense that there's willingness on either side of the table to make those painful choices.

HORSLEY: Francis points to what he calls a steady deterioration in governance over the last couple of decades. Not only are the two political parties increasingly polarized on fiscal issues, but you also had the January 6 attack on the Capitol. And now we have a former president who's been indicted on charges he tried to block the peaceful transfer of power - not really what you'd expect from a AAA-rated government.

PFEIFFER: How much damage could this downgrade do?

HORSLEY: Well, the practical fallout may be limited. Even with this downgrade, the nation still has the nation's - still has the second-highest credit rating, AA+. So it's not as though institutional investors are going to be forced to sell off their government bonds. There was, as you mentioned, a little gyration in the stock market today. The Dow dropped almost 350 points. But Treasury Secretary Janet Yellen does not think Fitch's move is going to scare investors away from buying government bonds.

(SOUNDBITE OF ARCHIVED RECORDING)

JANET YELLEN: At the end of the day, Fitch's decision does not change what all of us already know - that Treasury securities remain the world's preeminent safe and liquid asset and that the American economy is fundamentally strong.

HORSLEY: Yellen called the downgrade puzzling, given the country's very low unemployment rate, falling inflation and solid GDP growth. One thing to note - this downgrade was not based on some new piece of information or some financial secret that Fitch just uncovered. The political dysfunction the rating agency describes is something we've all been witness to in recent years, so Fitch's move may not change a lot of opinions.

PFEIFFER: And Scott, what would it take to restore the top bond rating, which, until yesterday, our government had?

HORSLEY: Well, some effort to address those long-term finances - reduce the deficit, address the challenges of funding Medicare and Social Security for an aging population. Fitch's Richard Francis says there are ways the government could improve its credit rating, but, given the way the two parties are dug in, he's not holding his breath.

FRANCIS: If we did actually think that there was some meaningful chance that the government could come together and tackle these issues, then we might say we can wait. But I just don't see that in the current political environment.

HORSLEY: Francis said it would also help if the government overhauled that debt ceiling so we don't have to face another round of brinkmanship in just a couple of years.

PFEIFFER: NPR's Scott Horsley, thank you.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.