In his address to the nation on July 25, President Barack Obama warned with certainty that if the credit rating of the United States is downgraded by the rating agencies, “interest rates will skyrocket on credit cards, on mortgages and on car loans, which amounts to a huge tax hike on the American people.”
The president’s statement was likely prompted by rating agency Standard & Poor’s pronouncement a week earlier that there was a 50 percent probability it would downgrade the U.S. credit rating in the next 90 days. The probability of a downgrade was increased from 33 percent just a few months prior.
The market determines interest rates, not the rating agencies.
The president’s statement seemed to indicate that with a downgrade, rising rates are an absolute certainty, and likely many Americans believed that to be true.
However, a downgrade does not necessarily translate into an automatic or even an eventual increase in the cost of borrowing.