REAL ECONOMY BLOG | May 25, 2023
Authored by RSM US LLP
The announcement on Wednesday that Fitch Ratings had placed the United States AAA credit rating on “Rating Watch Negative” is the latest sign that the policy brinkmanship over raising the nation’s debt ceiling is extracting a growing price on the U.S. economy and jeopardizing well-functioning financial markets.
The standoff by the U.S. political authority is imposing rising costs that will affect all firms, market participants and citizens of the United States the longer it endures.
It is time for the Federal Reserve to act pre-emptively to ensure well-functioning financial markets and signal to global market participants that the bond rating on U.S. Treasuries will remain unchanged.
On Aug. 5, 2011, after Standard and Poor’s downgraded the U.S. credit rating, the Federal Reserve issued the following statement.
“For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected.”
The Fed should now issue a similar statement to pre-empt any doubt about the creditworthiness of U.S.-issued debentures.
Whatever one’s point of view on the debt ceiling, the crisis has now moved into a new phase where its costs will become increasingly clear to all involved.
This should create a renewed sense of urgency to lift the debt ceiling and bring this crisis to a close before it spills over into broader global financial markets and the economy.
The longer this episode continues, the greater the risk that the global reserve status of the U.S. dollar will be put in danger.
Like the 2011 debt ceiling debacle, equity valuations that underscore American households’ retirement accounts will suffer while corporate and consumer confidence will almost surely decline.
All of these factors will create an adverse wealth effect that will show up on growth in the second half of the year.
This is an artificial crisis that has nothing to do with the underlying health of the American economy, excessive imbalances or malinvestment within financial markets or the security of the country.
It is time to bring it to an end.
This article was written by Joseph Brusuelas and originally appeared on 2023-05-25.
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