It’s party time now, as stocks soared yesterday on Fed chief Ben Bernanke’s dollar liquidity push to aid in Europe’s rescue. But the move risks further cheapening the buck — and raising the cost of
living on ordinary Americans. (REUTERS)
Wall Street — and the rest of the world’s financial markets — rejoiced yesterday after Federal Reserve Chairman Ben Bernanke joined forces with other bank chiefs to buy Europe more time to deal with its deepening debt crisis.
The Fed chief — along with five of the world’s biggest central banks — launched a coordinated plan that will make it cheaper for troubled European banks to borrow US dollars as they try to stave off a looming credit crunch.
The plan to inject much-needed liquidity into the financial system cheered Wall Street and markets around the world even though it does little to address Europe’s longer-term debt woes.
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The Dow Jones industrial average surged 4.2 percent, or 490.05 points — its biggest rally in more than 2 1/2 years.
The Standard & Poor’s 500 index jumped 51.77 points, or 4.3 percent, to 1,246.96.
While traders clinked their glasses, Bernanke’s efforts to shore up global markets could come at a cost to consumers, as the excess cheap cash stands to lower the value of the greenback while raising prices here at home.
A weaker dollar also raises the prices of imported goods, like computer chips, warned one hedge-fund manager.
Indeed, the dollar fell sharply on yesterday’s move as investors sought out currencies with higher returns. The Dow Jones FXCM Dollar Index was down more than 1 percent — its sharpest decline of the month.
Meanwhile, the price of oil and other commodities took off as the dollar plunged. Oil prices hit above $100 a barrel for only the second time in the last six months.
Experts said that the risk of inflation will depend on the size of the program after it launches Dec. 5.
“You’re putting your foot on the gas pedal of monetary expansion, which causes the price of gasoline to go up,” said David Darst, chief investment strategist at Morgan Stanley Smith Barney.
Yesterday’s move by Bernanke “is a big step in that direction,” he added.
Under the program, the central banks of the US, Europe, Japan, Canada, the UK and Switzerland have agreed to cut the costs of loans under so-called swap lines by 50 basis points. They would lend the money to the European Central Bank, which, in turn, would lend it to the banks.
The new program doesn’t directly address the root of Europe’s problems — or the fear of default by debt-burdened euro countries like Greece and Italy — so much as ease the resulting strain on banks and, ideally, free them up to loan.
Whether it works remains to be seen. Economists say they’re still keeping a watchful eye on Europe’s measures to cut spending and repay their debt.
Also, the swap line program was initially launched in 2008, and European banks have been reluctant to borrow under it, due to the stigma attached. The hope is that the new cheaper rates could change this, market watchers say.
The central banks yesterday also said they plan to keep the borrowing window open through Feb 1, 2013. Initially, it was expected to close in August 2012.