Markets rally on supportive words from the Fed chief
Bernanke to keep rates at record low and does not rule out printing more dollars
Published 10/08/2011 | 05:00
US stocks staged a major rally last night after the market took reassurance from a Federal Reserve statement that pledged new levels of support for the flagging American economy.
The Standard & Poor's 500 index closed up 4.7pc after the market dissected the statement from Ben Bernanke's Federal Reserve, which said it would keep interest rates at record lows at least until the middle of 2013.
A return of quantative easing was also not ruled out as the Fed said it would use "appropriate'' policy tools when required. The NASDAQ and the Dow Jones also rose.
The words used in the policy statement from Mr Bernanke and colleagues are supportive of equities, traders said.
While most of the statement was downbeat, the markets will take confidence from the sense that the Fed is content to leave monetary policy loose and further asset purchases cannot be ruled out.
The Fed offered a dimmer view of the economy than it did in the last statement in late June. "Economic growth so far this year has been considerably slower than the committee had expected," it said.
The Fed also said it expected a "somewhat slower pace of recovery over coming quarters", adding that "downside risks to the economic outlook have increased".
Meanwhile, investors shrugged off the weekend downgrade of the US by Standard & Poor's and actually rewarded the US with new low borrowing costs of 2.03pc, a drop of 28 basis points in just one day.
The Fed pledged for the first time to keep its benchmark interest rate at a record low at least through mid-2013 in a bid to revive the flagging recovery after a worldwide stock rout.
The Fed discussed a range of policy tools to bolster the economy and said it is prepared to use them "as appropriate".
Three members of the policy committee dissented, preferring to maintain the pledge to keep rates low for an "extended period".
The Fed left its target for the federal funds rate in a range of zero to 0.25pc, where it has been since December 2008.
It said it will maintain its policy of reinvesting maturing securities, without saying for how long.
The vote was 7-3. Richard Fisher, president of the Dallas Fed, Charles Plosser of Philadelphia and Narayana Kocherlakota of the Minneapolis Fed all dissented.
It was the first time under Mr Bernanke that three FOMC members have dissented.
US stocks rebounded from a rout that wiped out $1trn (€696m) yesterday in the first trading session after the government was stripped of its AAA rating at S&P.
The S&P 500 sank 11pc in the previous three days and started yesterday trading at 12.3 times reported earnings, compared with its average of 16.4 since 1954, according to data compiled by Bloomberg.
The MSCI All-Country World Index is valued at about 12 times profits, down from 21 in 1995, the data shows.
Meanwhile, billionaire investor Wilbur Ross said he was buying assets as the losses in global markets are being driven by fear rather than economic reality.
"Has the world really gotten 10, 12, 15pc worse in the last 48 hours? I don't think so," Mr Ross, who leads WL Ross & Co, said in an interview with Bloomberg Television.
"Buying stocks at today's prices over a couple of years' time period will prove to be a uniquely rewarding experience."