The U.S. credit rating has been upgraded by credit rating agency Standard & Poor’s from ‘negative’ to ‘stable’. The rating agency trimmed the U.S. AAA credit rating in 2011 and replaced it with a negative outlook.

U.S. Credit rating

Standard & Poor’s has also revised the outlook from negative to stable for the Federal Reserve and the Federal Reserve Bank of New York. The rating agency affirmed its ‘AA+’ long-term and ‘A-1+’ short-term unsolicited sovereign credit ratings for the U.S.

Reasons for Revised U.S. Rating

The revised ratings are based on the strengths of the U.S. economy and monetary system. Also, the ratings reflect the U.S. dollar’s status as the world’s key reserve currency. The ratings also include a high level of U.S. external indebtedness and the effectiveness of policies and political institutions along with the nation’s fiscal performance.

As per the rating agency, the U.S. is a high income economy with per capita income exceeding $49,000 in 2012. Standard & Poor’s expects the real per capita GDP growth to grow by slightly above 1 percent. Other factors contributing to strong sovereign credit quality are a well diversified and market-oriented economy with a flexible economic structure.

The rating agency believes that monetary authorities are capable enough to boost sustainable economic growth and ease any major financial shocks. This will help the dollar to maintain its position as the world’s leading reserve currency. The Federal Reserve System, backed by a free-floating U.S. exchange rate system, has a good command on dollar liquidity conditions—as demonstrated by the Fed’s timely and effective actions to minimize the impacts of major shocks since the Great Recession of 2008/2009. The Fed has been successful in keeping the inflation range bound within 0-5 percent since 1991. Also, the country’s fundamentally strong  capital markets and diversified financial system has aptly supported a monetary transmission mechanism.

Last month, the Congressional Budget Office (CBO) reduced its estimates for future government deficits. This cut in the estimates was contributed to by many factors including tax hikes, expenditure cuts, better than expected performance from the private sector, and increased remittance from government-sponsored enterprises Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).

Some Concerns

The current ‘AA+’ rating also indicates a lesser ability of U.S. elected officials to react aptly to public finance pressures when compared to the officials of a few other highly rated sovereigns.

The rating agency also warned that the improved fiscal performance may lead to complacency. Relaxing the fiscal policies without proper countervailing measures may put downward pressure on the rating, in the long run.

Responding to the news S&P 500 futures and the dollar were up.