Fed Chairman Keeps Market Rally Going
The stock market faltered for the first time this year last Wednesday. And it wasn’t pretty. Stocks fell more that day than they had any day in the prior three months.
The Dow gave up over 100 points, and both the S&P 500 and the Nasdaq declined by more than 1%.
What happened?
Last Wednesday was the day the minutes from the Fed’s January meeting were released. And as you can tell, what was said in the meeting clearly spooked investors.
The minutes showed that some Fed officials expressed concerns about the central bank’s ultralow interest rate and quantitative easing policies. They questioned if the policies were leading to the kind of excessive risk taking that gave rise to the financial crisis.
Now we’ve seen these kinds of concerns before by inflation hawks on the committee. But what really stood out this time was that a few middle-of-the-road officials echoed these concerns, including those who have backed Bernanke up to this point.
Here’s what happened next…
Investors interpreted these comments as a sign the Fed was considering an earlier than expected end to its third round of quantitative easing (QE3). Of course, QE3 is largely responsible for the market’s current gains as it’s pushing money into the market. So, investors started selling.
From that point until yesterday, the market had been moving lower. In fact, many investors were openly worrying that this was the beginning of the end for the rally off the November lows.
That is… until yesterday.
Yesterday, Fed Chairman Ben Bernanke testified before the Senate Banking Committee. And he said in no uncertain terms exactly what investors needed to hear.
He indicated that the Fed’s policies of near-zero interest rates and monthly bond-buying will continue until the economy is stronger and employment levels are higher.
He specifically said…
“The benefits of asset purchases, and of policy accommodation more generally, are clear…”
“Keeping long-term interest rates low has helped spark a recovery in the housing market and has led to increased sales and production of automobiles and other durable goods.”
In response to questions about the dangers of excessive risk-taking, Mr. Bernanke had this to say…
“… to this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation.”
And with regard to concerns expressed about inflation, Mr. Bernanke said…
“Inflation is currently subdued, and inflation expectations appear well anchored.”
No question about it, as long as Ben Bernanke is heading up the Fed, the dual policies of exceptionally low interest rates and quantitative easing will continue for as long as he thinks necessary.
This is great news for the market. And investors responded in kind, driving the Dow up by over 100 points yesterday, and sending each of the major market indices up by more than 1% so far today.
So, it looks like the market rally is safe for now. Thank you Ben Bernanke.
Profitably Yours,
Robert Morris
Category: Market Analysis, What's Going On?
