Yellen Reacts to Fitch Ratings Downgrade of U.S., GSEs

Just two months after placing Fannie Mae and Freddie Mac (the GSEs) on ‘Rating Watch Negative,’ Fitch Ratings has downgraded Fannie Mae's and Freddie Mac's Long-Term Issuer Default Ratings (IDR) and senior unsecured debt ratings to 'AA+' from 'AAA' and downgraded their respective Government Support Ratings (GSR) to 'aa+' from 'aaa'.

The downgrade by Fitch ’s was precipitated because the ratings for the GSEs are linked to the sovereign rating of the U.S., which the firm downgraded on Tuesday. Fitch Ratings said that both Fannie Mae and Freddie Mac as GSEs benefit from implicit government support, thereby warranting the downgrade.

News of the downgrade was met with negative reaction from the industry, and came as a surprise to many.

“I strongly disagree with Fitch Ratings’ decision. The change by Fitch Ratings announced today is arbitrary and based on outdated data," Secretary of the Treasury Janet L. Yellen said in a statement. "Fitch’s quantitative ratings model declined markedly between 2018 and 2020 – and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its decision. Many of these measures, including those related to governance, have shown improvement over the course of this Administration, with the passage of bipartisan legislation to address the debt limit, invest in infrastructure, and make other investments in America’s competitiveness. Fitch’s decision does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong."

Yellen cited the nation’s strong economic recovery from the Covid pandemic, in addition to the addition of 13 million-plus new jobs since January 2021, near-historically low 3.6% unemployment rate, and a monthly decline in overall annual inflation over the past year in arguing against the downgrade.

“The downgrade of Fannie Mae's and Freddie Mac's Long-Term IDRs and GSRs is consistent with the recent action taken on the U.S. and is not being driven by fundamental credit, capital or liquidity deterioration at the firms,” noted Fitch Ratings in its announcement. “The firms continue to benefit from meaningful financial support from the U.S. government. Key rating drivers for aligning Fannie Mae's and Freddie Mac's ratings to the U.S. rating include their mission critical function to the U.S. housing finance system and the U.S. Treasury's Senior Preferred Stock Purchase Agreements (SPSPAs). Fitch believes Fannie Mae continues to execute on its mission to provide liquidity, stability, and affordability to the housing finance industry, supporting rating equalization with the sovereign.”

Congresswoman Maxine Waters, the top Democrat on the House Financial Services Committee, commented and felt that there were political motivations behind the Fitch downgrade.

“Let’s be clear: the radical and unjustifiable actions of extreme MAGA Republicans are creating the excuses for market participants, including Fitch, to question the resiliency and recovery of the U.S. economy,” said Rep. Waters. “Under their extremist agenda in the House, Republicans not only engaged in a months-long brinkmanship over our nation’s debt, but on many occasions, encouraged what would’ve been a catastrophic debt default. Earlier this year, I warned my Republican colleagues several times that just the mere threat of a default, on its own, could lead to market volatility and a credit rating downgrade.”

Yellen added, "Over the past few years, the United States has undergone a historically fast economic recovery from a deep recession. Today, the unemployment rate is near historic lows, inflation has come down significantly since last summer, and last week’s GDP report shows that the U.S. economy continues to grow. The American economy remains the world’s largest and most dynamic economy, with the deepest and most liquid financial markets in the world. To build on this, President Biden and I have been focused on making critical investments in our country’s core economic strength and productive capacity. President Biden and I are committed to fiscal sustainability. The most recent debt limit legislation included over $1 trillion in deficit reduction and improved our fiscal trajectory. Looking forward, President Biden has put forward a budget that would reduce the deficit by $2.6 trillion over the next decade through a balanced approach that would support investments for the long-term.”