–QE2 Could Undermine Confidence in US$, Raise Inflation Expectations

By Yali N’Diaye

WASHINGTON (MNI) – Fitch Ratings Wednesday said it believes “the
U.S. fiscal metrics will be the worst of any ‘AAA’-rated sovereign,” due
to the higher-than-expected deficits and debt levels expected following
the extension of the Bush era tax cuts.

This despite the expected boost to U.S. GDP this year and in 2012.

And just like their peers at Standard & Poor’s and Moody’s,
analysts at Fitch Ratings warned in their latest Credit Outlook that
“the absence of a credible medium-term fiscal consolidation strategy is
eroding confidence in the sustainability of public finances and
commitment to low inflation, with potentially adverse implications for
the U.S. sovereign credit standing.”

Still, they note the “higher debt tolerance than for other ‘AAA’
and highly rated sovereigns” due to the “extraordinary fundamental
credit strengths” of the U.S., the flexibility and dynamism of its
economy and the status of the greenback as a global reserve currency.

Fitch recently had upgraded the U.S. economic growth forecast,
expecting the extension of the Bush-era tax cuts to add 0.6% to GDP
growth in 2011 and 2012.

It warned, however, that risks stemming from the weakness of the
labor and housing markets persist.

The report, titled ‘Navigating a Risk-Laden Recovery’ also warned
that fiscal and monetary measures that have been taken also imply risks.

In particular, the second round of asset purchases announced last
November by the Federal Reserve — the so-called QE2 — “could
undermine confidence in the U.S. dollar and raise inflation
expectations.” Inflation expectations would also be fed by the fact that
QE2 implies higher asset prices.

It also poses challenges to the rest of the world.

“Together with exceptionally low interest rates, quantitative
easing may result in yield-seeking capital and financial flows
undermining economic and financial stability in stronger-growing
emerging markets,” Fitch said.

Tuesday, Standard & Poor’s also maintained its stable outlook on
the ‘AAA’ rating of the U.S. government, assuming “the government will
soon reveal a credible plan to tighten fiscal policy to enable the
general government debt-to-GDP ratio to stabilize and then to decline in
the medium term.”

However, “Absent a credible plan, the rating on the U.S. federal
government will come under pressure.”

This echoed Moody’s analysis last week, saying that the U.S., the
UK, France and Germany “still possess debt metrics, including debt
affectability, that are compatible with their Aaa ratings.”

** Market News International Washington Bureau: 202-371-2121 **

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