IMF/Moody's: U.S. Economy Down Into 2009

The International Monetary Fund said that the economy is likely to under-perform through the middle of 2009. The IMF said the Federal Reserve should keep interest rates on hold, despite concerns that inflation is on the rise, according to Reuters.

Moody's, the second-largest credit rating agency, also warned that recovery in the creidt markets is expected to decline. 

"Concerns about activity would need to be much more pronounced to justify a more accommodative stance," IMF staff said in a report outlining its consultations with the U.S. Treasury and the Federal Reserve.”

On July 17, the IMF raised its economic growth projections for the United States to 1.3 percent in 2008, up from 0.5 percent it estimated in April.

An IMF official told Reuters that the U.S. economy has faired better than expected but difficult times lie ahead due to the housing crisis and overall weakened credit conditions. The IMF said that the U.S. dollar’s decline has moved the currency downward, to a “medium-term equilibrium.” Despite this downgrade, the dollar is still viewed as a strong currency.

The IMF said that the expansion of U.S. guarantee programs could prevent excess home price declines and that they supported legislation passed by Congress to restructure the housing market.

On July 30, President George W. Bush signed a law that launches a $300 billion government initiative to refinance troubled mortgages and increases oversight of housing finance providers Fannie Mae and Freddie Mac. The financial firms own or guarantee almost half of the country’s $12 trillion in home mortgage debt.

Richard Blumenthal, the attorney general for Connecticut, announced he was suing Moody’s, Standard & Poor’s and Fitch Ratings for intentionally giving lower ratings to bonds issued by municipalities, actions which he claims drove up costs for taxpayers, according to the Financial Times.

Raymond McDaniel, Moody’s CEO, said any allegations relating to the different ratings scale for municipal and corporate bond issuers were “completely meritless”.

Short interest in Moody’s stood at around 47m shares in mid-July, according to Bloomberg estimates. The shares represent approximately 20 percent of available shares, a high proportion of short interest trades.

The difficult conditions in the debt market are made harder by the increased regulatory and legal pressure on the credit ratings industry. Mortgages contine to reach distressed value levels are are continuously downgraded.  Financial institutions have already taken over $450 billion of write-downs, according to FT.