FITCH WARNING!

 

The downgrade of America’s credit rating by Fitch, which sought to justify the move in part by warning of Washington dysfunction, may end up causing a lot more of it. Fitch concluded that the consequences of gridlock, like the catastrophic default almost triggered by Republicans earlier this year, are further tarnishing America’s economic standing. Now, fresh fiscal brinkmanship is brewing among GOP members that threatens to do more damage. Congress left for an extended August recess without resolving conflicts over spending and social issues, raising the risk of a government shutdown when federal funding runs out after Sept. 30. Fitch’s rating determination has emboldened Republicans to try and demand fresh spending cuts as their price for avoiding a shutdown. One problem, however, is that the Fed will be making a key interest-rate decision in September, and the increased likelihood of a lengthy shutdown could upset its bid for a soft landing. Such a standoff “could make it even more difficult for the Fed,” says Gennadiy Goldberg, senior U.S. rate strategist at TD Securities. “It could lead to the Fed potentially missing a fall pivot point.” —David E. Rovella