Moody’s warns of US rating downgrade while Fed promises more stimulus

14th July 2011

The announcement came just hours before ratings agency Moody's warned it might strip the US of its AAA rating. Ben Bernanke is poised to inject further funds into the US economy and commit to several years of low interest rates to combat flagging growth and prevent further rises in the unemployment rate, says the report.

A third round of quantitative easing, called QE3, could be necessary if the economy fails to regain momentum in the second half of the year.

"The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support," Bernanke said.

Moody's said it will review the federal government's triple-A bond rating because the White House and Congress are running out of time to raise the nation's $14.3tn borrowing limit and avoid a default. The US treasury says the government will default on its debt if the limit is not raised by 2 August.

Moody's said: "An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments.

"Moody cites the risk that US lawmakers may fail to agree to extend its debt ceiling, reports the Financial Times (paywall).

This has put pressure on Asian shares, the report adds. The MSCI Asia Pacific index fell 0.2% following growing fears that the federal debt ceiling will fail to be raised by August 2.

However, some stocks have benefitted from the promise of further stimulus. For example, resource stocks remained strong from the hope of higher demand, reports the Financial Times (paywall). 

Stock markets jumped as investors cheered the prospect of increased support from the Federal Reserve, with the Dow Jones industrial average increasing 150 points, or 1.2%, in morning trading. The FTSE 100 closed up 37 points at 5906.

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