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Credit Credibility

UW economist Menzie Chinn says that there may not be much near-term impact after Fitch downgraded the U.S. credit rating.

A number of pennies — token coins perhaps left with a passing wish — rest at the feet of the Abraham Lincoln statue atop Bascom Hill at the University of Wisconsin-Madison on April 4, 2013. Might it be the start of a new tradition, much like the legend of rubbing Abe’s foot for good luck? (Photo by Jeff Miller/UW-Madison)

On August 1, 2023, the credit-rating firm Fitch downgraded the U.S. rating from AAA — its highest — to AA+. The next day, the U.S. stock market fell. But in the same period, the Federal Reserve indicated that it no longer thought the U.S. economy was headed for a recession, as inflation recedes and growth continues.

To find out what all this means, The UW Now Livestream turns to Professor Menzie Chinn, an economist in the La Follette School of Public Affairs. Chinn has served on the President’s Council of Economic Advisers and as a research associate for the National Bureau of Economic Research. He’s the coeditor of the Journal of International Money and Finance, coauthor of the forthcoming International Economics, and a coauthor on Econobrowser, a blog devoted to current macroeconomic issues. 

On August 8, Chinn will join Michael Knetter and UW–trained economist Dana Peterson for a discussion of the state of the economy.

My Main Area of Research Is:

My main area of research involves open economy macroeconomics and international finance. This is a broad area, encompassing the determinants of exchange rates, the pattern of trade deficits, the impact of government debt on interest rates, and [the] movement of capital between countries. Most recently, I have been working on what financial indicators best forecast recessions in the U.S. and other major economies.

Tonight on The UW Now Livestream, I’ll Talk About:

I’ll talk about why Fitch thought it appropriate to downgrade U.S. debt and what it practically means for the U.S. economy. In addition, I’ll discuss the short-term prospects for the U.S. economy.

If Viewers Remember Just One Thing, It’s:

The assessment of the U.S. government’s ability to repay its debt is inherently a subjective determination based on the trajectory of deficits, what is the amount of debt investors are willing to hold, and, in this case most importantly, the willingness of the political system to make choices to ensure payments will be made. In practical terms, the Fitch downgrade — like the S&P downgrade years ago — will have little practical effect on borrowing costs for the U.S. 

To Get Smart Fast, Read:

For numbers on the trajectory of debt under current law, the Congressional Budget Office is the best. For analysis, brookings.edu/centers/the-hutchins-center-on-fiscal-and-monetary-policy/. For the short-term macroeconomic outlook, the Calculated Risk blog and Econbrowser blog.

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