Risk of Fiscal Cliff “Lessened” – Fitch Ratings

Analysts at Fitch Ratings have released their latest “Risk Radar” report today with a mixed message on the impact of the looming U.S. fiscal cliff. While the agency says “the urgency” of the risk is lessened and calls it “an unlikely scenario,” Fitch also says “the US will fall into a recession by 2H13 following a severe and rapid fiscal tightening” such as the sequestration of funds currently approved by the U.S. Congress.

The implication here appears to be that the Congress understands the threat that the fiscal cliff presents not only for the U.S. economy, but also for the global economy and that the Congress will take some action — even if it is only to kick the can down the road for a few months. Fitch believes that if the U.S. falls off the fiscal cliff the impact on the global economy would be worse than another eurozone shock.

Inflation is not expected to be a big risk into next year, at least not for the federal government. Fitch notes, however, that flat yield curves mean that low investment returns are a disincentive to savings and “result in an inflationary impact on those on fixed incomes.”

Take a look at our list of U.S. companies that will survive a tumble off the fiscal cliff.

The “Risk Radar” report is available here.

Paul Ausick