Federal Reserve will take steps to help economy, investors predict
Wednesday, October 13, 2010; 9:12 PM
Investors are betting that the Federal Reserve will take new steps to bolster the economy, driving stocks higher Wednesday and extending a recent rally.
Several corporate earnings reports might have contributed to the market's optimism, but analysts said that the minutes of a Federal Reserve policy meeting released Tuesday raised expectations that the Fed will buy a boatload of Treasury bonds.
"There's a growing acceptance that the Fed will likely be successful in driving asset prices, including the equity market, higher," said Barry Knapp, an equity strategist at Barclays Capital.
Said Joseph Battipaglia, a market strategist at the brokerage and investment bank Stifel Nicolaus: "With a day to think about it, the conclusion is they're going to do something sooner than later" and "it may well be substantial."
The Standard & Poor's 500-stock index rose 0.7 percent Wednesday, to 1178.10, while the Dow Jones industrial average climbed 0.7 percent, to 11,096.08.
The S&P 500, a broad measure of U.S. stock market performance, has gained 12.3 percent since the end of August. That leaves it closer to its high point for 2010, set in the spring, than to its summer low.
The rebound began after Federal Reserve Chairman Ben S. Bernanke delivered an August speech saying he was prepared to take dramatic steps to boost the economic recovery if conditions warranted. Minutes of a Fed committee meeting showed that policymakers were leaning toward taking action that would increase the money supply and lower interest rates - apparently by purchasing Treasury securities.
Lower interest rates can boost the demand for stocks by making corporate dividends more attractive. In addition, the Fed's anticipated bond purchases could create gaps in private portfolios that investors ultimately fill with riskier investments such as stocks.
Confidence that the Fed could goose asset prices is going hand in hand with skepticism about the ultimate effects on the economy.
M. Cary Leahey, an economist at Decision Economics, said the Fed's expected course is a sign of weakness and is driven more by politics than by economics.
"It's to protect the Fed from being accused of not caring," he said.
Battipaglia noted that cheap money helped create the financial crisis of recent years.
"It was an overactive credit cycle that got us into trouble in the first place, and one could make the case that going back to what got you into trouble . . . is not a good remedy," he said.
Corporate earnings reports in recent days have sent mixed signals.
J.P. Morgan Chase, the banking giant, said Wednesday that it reduced reserves for losses on credit cards by $1.5 billion as its third-quarter profit rose 23 percent. Its shares fell 1.4 percent.
Intel, the big maker of computer chips, reported late Tuesday that "solid demand from corporate customers" contributed to a 59.2 percent increase in its third-quarter profit, compared with the same period last year. But its shares fell 2.7 percent.
CSX, which transports much of the nation's freight, said after the markets closed Tuesday that it "saw volume growth in nearly all markets" as its third-quarter profit rose nearly 43 percent. CSX shares soared by 4.2 percent Wednesday.