As the U.S. Department of Justice threatens to sue Federal Reserve Chair Jerome Powell, credit rating agencies have clearly delineated the boundaries of the Fed's independence. Fitch stated on Monday that it views the Fed's independence as a key supporting factor for maintaining the United States' AA+ sovereign rating.
Fitch Senior Director Richard Francis commented via email that the credit rating agency will continue to monitor the evolution of governance in its assessment of the U.S. sovereign rating. This includes the "institutional checks and balances" and the Federal Reserve's performance in achieving low and stable inflation.
Fitch's comments came as the Trump administration threatened to sue Fed Chair Powell over his congressional testimony last summer regarding a Fed building project. Powell characterized this move as a "pretext" to gain greater influence over the central bank and its monetary policy.
Credit rating agency S&P has also previously highlighted the Fed's credibility as a major key strength for the U.S. sovereign rating. In a report last October, S&P stated that the rating "could face pressure" if "political developments strain the strength of U.S. institutions, the effectiveness of long-term policymaking, or the independence of the Federal Reserve."
"We continue to view the credibility of the U.S. Federal Reserve as unmatched," S&P stated in the report. "This supports U.S. monetary flexibility and the status of the U.S. dollar as the premier international reserve currency—both of which are key components of the sovereign rating."
Collectively, these statements underscore that, although markets have so far reacted calmly to the political noise, credit rating agencies view central bank independence as an unshakeable institutional cornerstone. They indicate that any sustained erosion of this independence would have consequences reaching beyond financial markets, directly impacting the United States' sovereign credit profile itself.
When asked for comment on the latest developments on Monday, a spokesperson for S&P referred inquiries to the agency's previous reports.
