Fed moves help stocks soar in down economy
by Daniel Wagner and Christina Rexrode
Associated Press Writers
September 17, 2012 01:08 AM | 548 views | 0 0 comments | 3 3 recommendations | email to a friend | print
WASHINGTON — Economic growth is pitiful. Unemployment has topped 8 percent for an exhausting 43 months. The nation is careering toward a so-called fiscal cliff, and maybe a recession.

So why is the Dow Jones industrial average, that trusty gauge of corporate America’s strength, just 4 percent shy of an all-time record? And why are the smaller public companies measured by the Russell 2000 index almost there already?

Start with two words: Ben Bernanke.

Bernanke, the Federal Reserve chairman, last week announced unprecedented measures aimed at lifting the sagging economy — and boosting the prices of assets like stocks and houses. The market rallied all summer in anticipation of such a move.

The Fed made an open-ended promise to purchase $40 billion a month in mortgage bonds and said it will keep interest rates low through 2015, even if the economy starts to improve.

The announcement set off a two-day rally that drove the Dow up 260 points, leaving it less than 600 points shy of its record high — 14,164, reached on Oct. 9, 2007, two months before the recession began.

The Standard & Poor’s 500 index, a broader measure of the market’s strength, would need to gain less than 7 percent to surpass its own record, reached on the same day.

There’s ample reason to think Bernanke’s prescription will work, at least for stocks. The idea is to pump money into the economy to push interest rates even lower, which encourages spending, and drive up stocks, which makes people feel richer.

The hope is that also will drive people out of investments based on interest rates, such as CDs and bond mutual funds, and into stocks. If stock prices rise, investors will be richer and more likely to spend. It’s called the “wealth effect.”
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