Janet Yellen calls Fitch downgrade ‘entirely unwarranted’ amid US economy’s strength

MCLEAN, Virginia - US Treasury Secretary Janet Yellen on Wednesday voiced more objections to

Fitch Ratings’ downgrade of the main US credit rating,

calling it “entirely unwarranted” because it ignored improvements in governance metrics during the Biden administration and the country’s economic strength.

Speaking at an Internal Revenue Service (IRS) contractor office near Washington, Dr Yellen said the rating agency’s announcement on Tuesday failed to take into account a resilient US economy, with low unemployment, falling inflation, continued growth and strong innovation.

“Fitch’s decision is puzzling in the light of the economic strength we see in the United States,” Dr Yellen said. “I strongly disagree with Fitch’s decision, and I believe it is entirely unwarranted.”

She said Fitch’s “flawed assessment” was based on outdated data and failed to reflect improvements in US governance indicators over the past 2½ years of President Joe Biden’s administration.

“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 pre-eminent safe and liquid asset, and that the American economy is fundamentally strong.”

Fitch had cited a deterioration in US governance that started during the prior Trump administration in making its decision, according to US Treasury officials.

Mr Richard Francis, a senior director at Fitch, told Reuters that the deterioration was partly reflected in the Jan 6, 2021, insurrection at the US Capitol building as former president Donald Trump sought to overturn the 2020 election results.

But Mr Francis said the deterioration also was reflected in 2023’s debt ceiling fight, and the increasing polarisation of both major political parties, making compromise harder to achieve.

In its decision to cut the US rating by one notch to AA+ from AAA, Fitch also cited a fiscal deterioration over the next three years that will increase deficits and repeated down-to-the wire debt ceiling negotiations that threaten the US government’s ability to pay its bills.

But Dr Yellen said that fiscal responsibility was a priority for her and Mr Biden, and the June debt limit deal he reached with Republicans included more than US$1 trillion (S$1.3 trillion) in deficit reduction over 10 years.

Mr Biden’s proposed 2024 budget, which includes substantial tax hikes on wealthy individuals and corporations, would also reduce deficits by US$2.6 trillion over the next 10 years.

Dr Yellen said investments to modernise the IRS and improve tax enforcement, funded by US$60 billion in new resources provided by 2022’s Inflation Reduction Act, would cut deficits by “hundreds of billions of dollars” over a decade.

She visited the office of 22nd Century Technologies in McLean, Virginia, to highlight a pledge to allow taxpayers to submit all documents and correspondence digitally during the 2024 tax season, which would eliminate the manual processing of up to 125 million documents annually. The company has a contract to develop scanning technology to convert paper documents so that they can be digitally processed. REUTERS