Fitch Affirms US at AA+, Sees Growth Slowing to 1.9% Amid Fiscal Warning
0h ago|5 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
us-credit-ratingfitch-ratings
Fazen Markets Editorial Desk
Collective editorial team · methodology
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Fitch Ratings affirmed the United States' long-term foreign-currency issuer default rating at AA+ with a stable outlook on August 13, 2026. The agency simultaneously downgraded its US growth forecast to 1.9% for 2026 and 2027, a sharp deceleration from the 2.8% expansion recorded in 2025. While the affirmation removes near-term downgrade risk, the accompanying analysis warned of persistent fiscal deterioration driven by entitlement spending and heightened political gridlock, keeping structural pressures on the sovereign credit story.
The affirmation locks in the assessment Fitch first delivered in August 2023, when it downgraded the US from AAA to AA+. That 2023 move was a significant market event, making Fitch the second of the 'Big Three' agencies to strip the US of its top rating after S&P's 2011 downgrade. Moody's held out longer, maintaining the US at Aaa until its own downgrade to Aa1 in 2025. The current macro backdrop features a Federal Reserve that has paused its hiking cycle but continues to debate further tightening, with market-implied odds for a September hike softening below 30% this week.
The catalyst for this specific review was Fitch's scheduled annual assessment of US sovereign creditworthiness. The decision to maintain the stable outlook, rather than shift to negative, indicates the agency does not see an immediate trigger for another downgrade within its 12-18 month horizon. The more cautious growth forecast and pointed fiscal warnings, however, signal that the underlying credit trajectory has not improved since the 2023 downgrade. The agency acted against a backdrop of clear labor market cooling, with nonfarm payroll growth averaging below 150,000 in recent months.
Fitch's updated economic projections form the core of the numerical shift. The agency expects US real GDP growth of 1.9% in both 2026 and 2027, down from 2.8% in 2025. This slowdown is attributed to a weakening labor market where job creation has dropped significantly in 2026. On inflation, Fitch projects a slower return to the Fed's 2% target than some policymakers anticipate, forecasting it will not be reached until the end of 2028.
The fiscal projections carry heavier long-term weight. Fitch estimates that combined Medicare and Social Security costs will expand by nearly one percentage point of GDP by 2032. This structural rise in mandatory spending occurs against existing high deficits. The US federal deficit for fiscal 2025 was approximately 5.8% of GDP. The debt-to-GDP ratio, a key metric for rating agencies, stands above 120% and is projected to continue rising. For context, the median debt-to-GDP ratio for sovereigns rated AA by Fitch is approximately 40%.
| Metric | 2025 Actual / Estimate | 2026-2027 Forecast |
|---|---|---|
| Real GDP Growth | 2.8% | 1.9% |
| Inflation (to Target) | — | End of 2028 |
| Entitlement Spending Increase (by 2032) | — | +~1% of GDP |
The 10-year US Treasury yield, a primary gauge of sovereign risk, was trading near 4.18% at the time of the announcement, roughly 20 basis points below its 2024 peak. This level suggests bond markets have already priced in a growth slowdown and a patient Fed.
The immediate market reaction was muted, as Fitch's 2023 downgrade had already priced much of this fiscal narrative into Treasury markets. The confirmation of slower growth, however, provides fixed income desks with another data point supporting the case for a less hawkish Federal Reserve. This dynamic typically supports intermediate-duration Treasury bonds (IEI) and could weigh on the US Dollar Index (DXY) by reducing interest rate differentials. Sectors sensitive to economic growth, like industrials (XLI) and consumer discretionary (XLY), may face headwinds from the downgraded growth outlook.
A key counter-argument is that the US retains exceptional financing flexibility due to the dollar's reserve currency status and the deep liquidity of Treasury markets, factors Fitch explicitly cited as rating supports. This unique privilege allows the US to sustain higher debt levels than other sovereigns without an immediate crisis. The primary risk Fitch highlighted is not a funding crisis but a gradual erosion of fiscal space, which makes the long end of the yield curve (TLT) particularly sensitive to any fresh political dysfunction, such as a protracted government shutdown.
Positioning data shows institutional investors have been cautiously adding to duration in recent weeks, anticipating a growth slowdown. Flow has moved into defensive equity sectors like utilities (XLU) and healthcare (XLV), which are less cyclical. The explicit warning on entitlement spending could renew focus on healthcare cost containment, potentially pressuring certain managed care organizations (UNH, CVS) if policy discussions intensify.
The next major catalyst for US credit markets is the Federal Open Market Committee decision on September 17, 2026. The committee's updated Summary of Economic Projections will show if Fed officials align with Fitch's gloomier 1.9% growth forecast. A confirmation would solidify expectations for a prolonged pause, while a more optimistic outlook could revive hawkish fears.
Treasury yields are the key level to watch. A sustained break above 4.35% on the 10-year note would signal that bond vigilantes are pricing in higher term premium due to fiscal concerns, invalidating the muted reaction to Fitch. Conversely, a drop below 4.05% would indicate the growth scare is dominating trader calculus. The next debt ceiling deadline, while not until mid-2027, will begin entering market discourse later this year; any early signs of political brinksmanship could trigger volatility.
Third-quarter earnings season, beginning in October, will provide a real-time check on Fitch's growth assessment. Guidance cuts from bellwether industrials or retailers would validate the slowdown thesis. The Bureau of Labor Statistics' September jobs report, due October 2, is the next critical datapoint on labor market health.
A stable outlook indicates Fitch believes the US credit profile is unlikely to change materially over the next 12 to 24 months, making another rating change (upgrade or downgrade) less probable in that period. It is a signal of temporary equilibrium, not an improvement in the underlying credit story. The agency balances the economy's fundamental strengths against known fiscal deterioration and political risks, concluding these forces are currently in balance.
Fitch's AA+ rating is now aligned with S&P Global Ratings, which has also rated the US AA+ since 2011. Moody's Investors Service currently rates the US one notch lower at Aa1, following its 2025 downgrade. All three agencies maintain a stable outlook. While the ratings are similar, the agencies' methodologies and emphasis can differ; Fitch's latest commentary placed particular weight on medium-term fiscal pressures from entitlement programs.
Ratings matter because they influence the cost and availability of credit for all borrowers in an economy, not just the sovereign. A lower sovereign rating can lead to higher interest rates for corporations, municipalities, and consumers as risk premiums adjust. many institutional investors, like pension funds and central banks, have internal mandates or regulatory requirements that restrict holdings based on credit ratings, potentially affecting demand for US Treasury securities.
Fitch's affirmation confirms the US credit trajectory remains constrained by structural fiscal pressures despite avoiding a near-term downgrade.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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