Egan-Jones: QE3 Could Trigger Downgrade Of US Rating

-- Egan-Jones Ratings says QE3 could trigger a downgrade of U.S. credit rating
-- Egan-Jones currently rates U.S. as AA+
-- Further bond buying would accelerate real inflation, hurting economy


NEW YORK (Dow Jones)--Another round of bond buying by the Federal Reserve could trigger a downgrade of the U.S. government's sovereign debt rating, a senior official at Egan-Jones Ratings Co. said Thursday.

A third quantitative easing program would at the very least lead Egan-Jones to review the U.S. sovereign debt rating, said William Hassiepen, vice president and senior analyst at the ratings firm. Egan-Jones rates the U.S. at double-A-plus, one notch below a perfect, triple-A rating.

"It would definitely trigger a review," Hassiepen said of another bond-buying program. "And the review, I think, would not be favorable."

Egan-Jones' U.S. rating is on par with Standard & Poor's, which downgraded the U.S. from triple-A in August. Moody's Investors Service and Fitch Ratings, which along with S&P form the "big three" ratings agencies, both have the U.S. as triple-A.

Market participants said Federal Reserve Chairman Ben Bernanke's comments before Congress Wednesday, where he failed to mention easing, were a sign the stimulus was less likely than previously thought. That helped boost the value of the dollar against other currencies. Bernanke is again on Capitol Hill Thursday, testifying before a Senate committee.

Another round of asset purchases would accelerate real inflation, thereby hurting the economy, Hassiepen said.

Accommodative monetary policy has helped one segment of the economy--the financial sector--but has hurt the rest of it, Hassiepen said, noting that rising gas and food prices take a toll on the economy while wages have not increased to match rising consumer costs.

Further bond purchases would only serve to drive commodity prices higher because it would weaken the dollar, he added. Most major commodities are priced in dollars so many investors pour money into commodities as the dollar becomes cheaper.

When the Fed looks at inflation, it removes prices of oil, food and other commodities.

The ultra-loose monetary policy also comes a time when the U.S. is running huge deficits, which further hurts the country's long-term economic outlook, Hassiepen said.

"I think QE1 and QE2 have put a squeeze on the population," Hassiepen said. "Instead of a squeeze, QE3 will put a stranglehold on the population."