On Tuesday, the US credit rating was downgraded by a rating agency for only the second time in history, which has caused analysts to worry about what could happen to the economy and people’s finances if the country’s debt continues to grow.
What kind of impact will a credit downgrade have on the economy?
Credit-rating decisions, like the one Fitch made on Tuesday, are based on how well the country can handle its growing debt. Downgrades, like the one Fitch made on Tuesday, are part of a chain of events that can make investors think there is a higher chance of default, which can lead to higher interest rates on loans and higher costs for U.S. debt.
NBC says that economists think the credit downgrade won’t affect consumers much in the short term. Gus Faucher, who is a senior vice president and chief economist at PNC Financial Services Group, says that most consumers won’t care about it.
According to economists, the credit downgrade serves as a cautionary signal to taxpayers concerning the medium- and long-term fiscal well-being of the U.S. government. Political polarization, especially when it comes to federal spending, is a big reason for the growing fear. As long as there are disagreements in Washington, there is a chance that the debt limit won’t be raised and that there could be another government shutdown as soon as this fall.
The effects of the credit downgrade on the financial circumstances of average individuals
If the US debt continues to grow and the government struggles to manage it, consumers may face higher interest rates on loans due to a loss of confidence in the nation and its borrowers. This would result in higher interest rates for credit cards, mortgages, and auto loans, among other essentials.
Probable future downgrades by Fitch or other credit rating agencies could have been bad for the financial health of the United States. Tom Graff, who is in charge of investments at Facet Wealth, stressed that the crisis could also have long-term effects.
As a result of the credit rating decision, the stock market went down on Wednesday afternoon. According to ABC News, the tech-heavy Nasdaq fell nearly 2%, and the S&P 500 fell more than 1%. Ivan Feinseth, a market analyst at Tigress Financial, thinks that the recent drop in stocks is just a temporary hiccup. He says that the economy is still in good shape overall, with inflation going down and more jobs being created.