Fitch affirms US at AA+, removes near-term downgrade risk, but expresses caution on growth slowdown and fiscal strain. The US economy's fundamental strength supports the rating, despite warnings on fi
Fitch Ratings has affirmed the United States' long-term sovereign credit rating at AA+, maintaining a stable outlook despite a slowing economy and mounting fiscal strain. The rating agency now expects US growth to moderate to 1.9% in both 2026 and 2027, a step down from 2.8% recorded in 2025. This growth downgrade, combined with a weakening labor market, provides another data point supporting softer Fed rate hike odds.
The key drivers of the slowdown include a clear cooling in the labor market, with labor demand weakening and job creation dropping significantly this year. On inflation, Fitch projects that price growth will not return to target until the end of 2028, striking a more patient tone than some Fed officials. Despite the softer growth outlook, Fitch says the AA+ rating remains underpinned by the fundamental strength of the US economy, including its sheer scale of output, high per capita income levels, and dynamic business environment.
The background to this decision lies in Fitch's previous downgrade of the US from AAA to AA+ in 2023, which was driven by concerns around fiscal governance and repeated brinkmanship over the debt ceiling. Since then, there has been no material change in trajectory, and Thursday's decision reads less as new information for markets and more as a formal restatement of a fiscal picture that ratings agencies, and increasingly bond investors, have already priced in. Fitch's warnings on fiscal policy and political dysfunction, including gridlock and government shutdowns, may become both more likely and more protracted going forward.
The more pointed warnings in Fitch's commentary centered on fiscal policy and political dysfunction, with the agency highlighting the growing burden of entitlement spending. Medicare and Social Security expenditures are projected to expand by nearly one percentage point of GDP by 2032 as the population continues to age. High fiscal deficits, a substantial interest burden, and government debt levels that are already high and still rising continue to constrain the rating.
Fitch is one of the 'Big Three' credit rating agencies, alongside S&P Global Ratings and Moody's, and its ratings carry real weight due to its recognition as a Nationally Recognised Statistical Rating Organization by the SEC. This designation gives Fitch's ratings regulatory authority, feeding into bank capital rules, bond index inclusion criteria, and institutional mandate thresholds. Many large institutional investors and index providers require ratings from at least two of the three agencies, keeping Fitch structurally relevant.
The market reaction to Fitch's affirmation is likely to be muted, given that the fiscal narrative and growth slowdown are already priced in. However, the agency's commentary on fiscal policy and political dysfunction may keep the long end of the Treasury curve sensitive to any fresh political dysfunction out of Washington. Traders should watch for any signs of gridlock or government shutdowns, which could impact the US economy and, in turn, the financial markets.
In terms of implications, Fitch's affirmation removes near-term downgrade risk from the US sovereign story, but the accompanying commentary leans cautious rather than reassuring. The softer growth outlook and warnings on fiscal policy and political dysfunction may influence the Fed's rate hike decisions and impact the overall direction of the US economy. As such, traders should continue to monitor the situation closely, watching for any developments that could impact the US credit rating and, by extension, the global financial markets.
Source: InvestingLive. Summarized and rewritten by the Vexoda Newsroom. This is market news, not financial advice.