While you were sleeping: Bernanke lifts risk bid

Tuesday 27th March 2012

US Federal Reserve chairman Ben Bernanke lifted the mood on Wall Street saying the world's largest economy must accelerate faster to help lower the jobless rate, providing hope that further stimulus might be on the way.

While Bernanke stopped short of saying that the Fed plans to embark on a third round of bond purchases, he made clear the US central bank will keep monetary policy very accommodative. He said the recent drop in the jobless rate was "somewhat out of sync" with the current modest pace of economic growth.

"A wide range of indicators suggests that the job market has been improving, which is a welcome development indeed,” Bernanke said today to the National Association for Business Economics in Arlington, Virginia. “Still, conditions remain far from normal."

The Fed’s forecasts for growth still are above the average Wall Street prediction. Central bankers predicted in January that the US economy would expand by 2.2 percent to 2.7 percent in 2012, compared with a median projection of 2.2 percent in a Bloomberg News survey of 70 economists from March 9 to March 13. The Fed will update its economic forecasts at its April meeting. The US expanded 1.7 percent in 2011.

Equities advanced as a result of Bernanke's comments. In early afternoon trading in New York, the Dow Jones Industrial Average rose 0.97 percent, the Standard & Poor's 500 Index gained 0.99 percent and the Nasdaq Composite Index climbed 1.40 percent.

"We are clearly addicted to this highly liquid market, and Bernanke has reassured that it stay up this way. The market likes these kind of reassurances," Kent Engelke, chief economic strategist at Capitol Securities Management, told Reuters. "The risk trade is definitely on and money is moving out of Treasuries and into risky assets."

Underpinning the need for help was a report showing an unexpected decline in contracts to buy previously owned homes in the US.

The index of pending home purchases dropped 0.5 percent to 96.5 in February after a 2 percent gain the previous month, according to the National Association of Realtors. January’s reading of 97 was the highest in two years.

In Europe, the Stoxx 600 Index ended the session with a 1 percent gain for the day.

Helping the mood in the euro zone was a report showing that German business sentiment unexpectedly climbed in March. Germany's Ifo Institute said its business climate index, based on a monthly survey of about 7,000 companies, rose to 109.8 in March from a revised 109.7 in February, climbing for the fifth month in a row.

Meanwhile, Germany indicated for the first time that it is willing to bolster the resources available for stemming the euro zone debt crisis, according to Reuters. There is growing concern about Spain's ability to check its debt.

Euro zone finance ministers are meeting in Copenhagen later this week where they are expected to agree on a way to boost the region's 500 billion euro rescue fund.

(BusinessDesk)

BusinessDesk.co.nz

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