“Extraordinary Reversal”: Moody’s nearly halves GDP forecast, QE3 on horizon

By Peter Schroeder (Hill.com):

Citing an “extraordinary reversal of fortune,” Moody’s Analytics on Monday significantly lowered its hopes for the nation’s economy through 2011, nearly halving its expectations for growth over the next six months.

Recent drama on the economic front, headlined by the debt-limit drama that led to an unprecedented downgrade of the nation’s credit rating, have “eviscerated” investor and business confidence, Moody’s said.

The company, which is related to credit rating agency Moody’s Investors Service, lowered its expected growth of the nation’s gross domestic product to roughly 2 percent for the remainder of the year, down from its 3.5 percent growth expectation of just a month ago.

And while the research shop once expected unemployment to dip below 8 percent by the end of 2012, it now expects it to linger around 8.5 percent in the months following the presidential campaign.

The new report suggests the 2012 campaign for the White House will take place against the backdrop of a continuing-to-struggle economy, which could hurt President Obama’s chances for reelection.

Obama is on the road this week in the Midwest, where he lambasted Congress on Monday for the debt ceiling talks.

The nation’s economic psyche was already iffy following the deep recession. And the debt theatrics, continued European instability, and repeated violent swings in the stock market have sent people and businesses running for cover, Moody’s said.

“Falling stock prices weigh heavily on those animal spirits so vital to a well-functioning economy,” Moody’s stated. “Markets and the economy seem one shock away from dangerously unraveling.”

Standard & Poor’s became the first rater in history to downgrade the United State’s debt earlier in July, but Moody’s has maintained the nation’s AAA rating while placing it on watch for a downgrade.

The Federal Reserve attempted to assuage markets on July 9 by saying it would be keeping interest rates near zero for at least two more years. The “unprecedented” move also increases the odds that the central bank will embark on a third round of asset purchases known as “quantitative easing,” according to Moody’s. It now expects “QE3” to begin sometime in the next few months.

Read more at the Hill.com HERE.