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Stocks roared to broad and healthy advances yesterday, hitting their highest levels since December 2007 after Ben Bernanke unholstered his latest weapon to rev up the US economy.
The embattled Federal Reserve chief said the central bank would start buying $40 billion in mortgage securities a month.
The purchases, which will last as long as needed, are part of a third round of actions — known as quantitative easing.
“It’s no panacea, and we’re not promising to cure all the ills of the economy,” Bernanke told reporters. “We believe it will offer a measure of confidence in the economy.”
Some of the bonds to be purchased are issued by the Treasury itself, and others are from vast portfolios mortgage-backed securities once feared as toxic.
To date, Bernanke has purchased $2 trillion of securities on the Fed’s balance sheet to bolster the economy, tripling its liabilities to $2.9 trillion.
So far, the Fed’s actions have done little to stimulate economic growth. There was no consensus on Wall Street yesterday that QE3, as the action is known, will turn out any better.
“We doubt it will be enough to get the economy on the right track,” said economist Paul Ashworth at Capital Economics. “It’s only a matter of time before speculation begins as to when the Fed will raise its purchases from $40 billion a month.”
Most analysts praised the moves, but Bernanke was confronted at his news conference on whether his plan would help just Wall Street with little benefit for Main Street.
Bernanke explained the plan would lift home prices and trigger a domino spending effect across the economy.
“With their home prices rising, people will start to feel more confident about spending again, and companies will start increasing activity and hire more people,” he said.
Investors got their benefits first.
The S&P 500 Index — the broad measure used by professional investors — climbed 1.6 percent to 1,459.99, its third straight winning session and the highest close since Dec. 31, 2007.
The Dow Jones industrial average jumped 1.6 percent to 13,539.86, its highest close since Dec. 27, 2007. The Dow is up 10.8 percent this year.
The Nasdaq gained 1.3 percent yesterday and is up 21.1 percent this year.
Bernanke said he was moved to start QE3 after the unemployment rate stubbornly stayed above the 8 percent mark.
At 8.1 percent, the unemployment rate in the US is a “grave concern” to the Fed. Bernanke said.
Bernanke also said the Fed would keep the federal funds rate near zero percent through mid-2015.