S&P Affirms US Credit Rating at AA+/A-1+ Despite Tariff Controversy

Standard & Poor's (S&P) has affirmed the United States' credit rating at "AA+/A-1+", maintaining a stable outlook. The agency acknowledged that the revenue generated from the administration's tariff policies would help offset the fiscal impact of recent tax cuts, thereby supporting the current credit rating. This decision comes despite widespread criticism and market disruptions caused by the tariff policies, which have raised concerns among foreign governments and economists.

S&P's affirmation is based on the expectation that the income from tariffs will counteract the financial strain caused by recent tax and spending legislation. The agency's report highlighted that the tariff revenue would largely offset the potential weakening of the fiscal situation due to tax cuts and increased spending. This assessment aligns with the administration's stance that tariffs are contributing to improving the nation's fiscal health, as evidenced by the record-high tariff revenue of 280 billion dollars in July.

The affirmation by S&P provides a measure of validation for the administration's tariff policies, which have been a contentious issue. While the policies have been criticized for causing market instability and anxiety, particularly in Asia, S&P's decision suggests that the revenue generated from tariffs is seen as a stabilizing factor for the U.S. economy. The agency's stable outlook indicates that while significant improvements in the fiscal deficit are not expected in the near future, a continued deterioration is also unlikely.

S&P's report also noted that the government's net debt is expected to exceed 100% of GDP in the next three years, with an average annual deficit of 6% between 2025 and 2028. This projection is slightly lower than the 7.5% deficit recorded in the previous year, indicating a modest improvement in the fiscal situation. The agency's assessment underscores the complex nature of the U.S. fiscal health, which is influenced by a range of factors including tax policies, spending, and trade revenues.

Despite the affirmation, there remains debate among economists about the long-term impact of tariffs on the U.S. economy. Some argue that the administration's policies create a paradox: while tariffs generate revenue, efforts to bring production back to the U.S. and encourage domestic consumption could reduce future tariff income. The administration has projected that tariff revenue could exceed 1% of GDP by 2025, a significant increase from previous estimates. However, the non-partisan Congressional Budget Office has estimated that recent budget legislation could add 3.4 trillion dollars to the deficit over the next decade, highlighting the ongoing fiscal challenges.

Market reactions to S&P's affirmation have been relatively muted, with U.S. bond prices experiencing a slight increase and yields on 10-year and 30-year Treasuries falling by 1 basis point each. The dollar index also saw a minor decline, indicating that the short-term impact of the report was limited. Analysts have noted that the affirmation does not represent a significant change in the U.S. fiscal health but rather a symbolic recognition of the current economic conditions. The market's focus remains on upcoming events, such as the Federal Reserve's policy decisions and economic data releases, which will provide further insights into the trajectory of the U.S. economy.