US rating outlook stays negative at ‘AAA’, expect Fed will start to raise the policy rate in 2023 – Fitch

In its latest US Long-Term Foreign-Currency Issuer Default Rating (IDR) rating report, Fitch keeps the US status of ‘AAA’ while also holding a negative outlook for the rating.

The rating giant considers the US debt tolerance to be higher than that of other 'AAA' sovereigns while also highlighting risks to the public finances and debt trajectory.

Key quotes (from Fitch report)…

The general government deficit in 2021 will be 14% of GDP, only marginally down from an estimated 14.9% of GDP in 2020. 

A relative tightening in fiscal policy as pandemic relief spending rolls off is the key feature of Fitch's baseline fiscal forecasts.

Fitch expects the general government deficit to narrow to 7% of GDP in 2022.

Fitch expects inflation to moderate over 2022-2023 while acknowledging upside risks from commodity prices, housing and supply bottlenecks. 

Unemployment levels reflect a still-depressed labor force participation rate, given the still-high shortfall in the number of jobs compared with February 2020.

Fitch expects the Fed will start to raise the policy rate in 2023.

FX implications

Strong inflation data backs the rating giant’s hopes of monetary policy adjustment, favoring the latest risk-off mood. Even so, S&P 500 Futures print mild gains by the press time of early Wednesday morning in Asia.