The downgrade: Does it matter?

By Sam Sutton and Zachary Warmbrodt

Presented by Structured Finance Association

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Fitch’s decision to lower the U.S.’s debt rating represents a serious reputational blow that has the potential to tighten credit conditions and further claims that its reign over global markets has started to fade.

“Potential” being the operative word.

Biden officials and Wall Street economists blasted Fitch's decision on Tuesday evening, arguing that it was unlikely to dent faith in Treasury securities that have provided a foundation for the global financial system for decades.

And while there could be serious second order effects, the colossal advantages that have kept government borrowing costs low are still intact. Even Larry Summers, a frequent critic of the administration’s economic and fiscal policies, pooh-poohed Fitch’s decision.

“Rating agencies follow markets, they don't lead them — especially in the case of widely followed markets. And Treasury is the most widely followed of all,” the former Treasury secretary told Sam. “Nobody sensible should change their mind about anything on the basis of Fitch's proclamation.”

Even so, the factors that informed Fitch’s decision — an inadequate fiscal framework, a complex budgeting process and other looming challenges — also persist.

“There’s not a lot of cause for optimism,” Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget, told Sam.

“The debt ceiling deal could’ve been a starting point for bipartisan compromises and fiscal improvements but that has not been proven to become the norm,” she added.

Meanwhile, Biden world is trying to spin the Fitch downgrade into political gold. The ratings agency’s decision landed around the same time special counsel Jack Smith unveiled four felony counts against former President Donald Trump stemming from his attempts to seize a second term after losing the 2020 election.

Administration officials told reporters on Tuesday that Fitch repeatedly raised the Jan. 6, 2021 riot at the Capitol as a factor — the agency had cited the contested 2020 election in an earlier warning — and Biden-Harris campaign spokesperson Kevin Munoz labeled Fitch’s decision “this Trump downgrade.”

It’s Wednesday — And you were worried it would be a slow news week. Send tips: Zach Warmbordt, Sam Sutton.

A message from Structured Finance Association:

Did you know? Your mortgage, credit card, or small-business or car loan probably has a lower interest rate because of securitization, the bundling of your loan with other loans for added safety by members of the Structured Finance Association. Learn more at www.structuredfinance.org.

First in MM: Senators warn election betting is ‘clear threat’ to democracy – Six Senate Democrats are pressing CFTC Chair Rostin Behnam to reject a proposal that would allow betting on who will control Congress.

In a letter today, Sens. Jeff Merkley, Sheldon Whitehouse, Ed Markey, Elizabeth Warren, Chris Van Hollen and Dianne Feinstein called the plan by prediction market Kalshi “a clear threat to our democracy and elections.”

“There is no doubt that the mass commodification of our democratic process would raise widespread concerns about the integrity of our electoral process,” they said.

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Jobs market shows hint of cooling — The WSJ reports that job openings in June fell to their lowest level since April 2021, while layoffs held nearly steady, according to government data released Tuesday.

It’s a sign that the Federal Reserve is making some progress in slowing the economy with its rate-hike campaign, which may continue as the central bank tries to curb inflation.

Manufacturing keeps shrinking — CNBC reports that the ISM Manufacturing Index on Tuesday showed the sector continues to contract, reflecting an ongoing shift from goods to services consumption in the Covid-19 recovery.

Creator of recession gauge hopes she’s wrong — Former Fed senior economist Claudia Sahm told Bloomberg she won’t be sad if her namesake recession indicator breaks this time.

“I would love it to trigger and there not to be a recession,” she said.

Competing credit union groups to merge — Victoria Guida reports that the two main credit union trade associations plan to combine, in a move to bolster the industry's lobbying impact.

The National Association of Federally-Insured Credit Unions and the Credit Union National Association want to become America’s Credit Unions, if their membership approves the merger.

CUNA head Jim Nussle, a former House lawmaker, plans to lead the combined group.

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Treasury faces losses on trucking giant’s collapse — The WSJ reports that taxpayers could lose money from the shutdown of trucking firm Yellow, which received a $700 million loan from the Trump administration during the height of the pandemic.

Treasury has a 30 percent stake in the company. Its losses will depend on how much Yellow can raise by selling real estate and other assets in bankruptcy.

“I expect Treasury is just going to take its licks here,” Georgetown Law professor Adam Levitin said.

A fight over rising rent — Katy O’Donnell reports that Senate Democrats and tenant advocates are pressing the FHFA to curb rent increases for about 12 million apartment units, triggering resistance from the housing industry.

Seventeen senators led by Banking Chair Sherrod Brown of Ohio urged the FHFA this week to impose “limits against egregious rent hikes in properties with financing backed by Fannie Mae and Freddie Mac.”

Pressure has risen on the White House to do something as the national median rent has surged by more than 15 percent in the last two years. Housing industry groups say capping rent hikes would backfire and cause fewer apartment units to be built.

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A U.K. move to watch — The FT reports that senior Bank of England official Sarah Breeden will be the central bank’s next deputy governor for financial stability.

Breeden has been spearheading the Bank of England’s work on shadow banking risks, including investment funds, hedge funds and crypto. She has also led efforts on climate and shoring up the pensions industry.

In addition to overseeing financial stability concerns, she will sit on the Bank of England’s monetary policy and prudential regulation committees.

A message from Structured Finance Association:

When loans are bundled together – a process called securitization – the result is less risk and lower interest rates for American families and small businesses. Securitization provides $15.6 trillion in financing and last year funded over half of U.S. household debt. Members of the Structured Finance Association give individuals and businesses access to essential credit at a lower price through securitization. Learn more at www.structuredfinance.org.

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