Fed Announces New Round of Easing, Markets Jump
Markets jumped to multi-year highs on Thursday as Federal Reserve Chairman Ben Bernanke announced a new round of quantitative easing aimed at lowering the cost of mortgages. The Fed pledged to purchase $40 billion of additional mortgage backed securities per month on an open ended basis to lower the unemployment rate and boost the economy. The plan, commonly known as QE3, is in addition to the existing "QE-Lite," in which the Fed has been reinvesting the proceeds from maturing bonds back into mortgage backed securities.
In addition to launching QE3, the Fed lowered its GDP forecast for 2012 but raised its forecast for 2013. The Fed also slightly raised its inflation forecast, but the Bank cited the record drought in the U.S. and political tensions as reasons for rising prices. Increased unrest in the Middle East may be increasing the price of oil as well.
The easing efforts from the Fed are the latest round of central bank actions attempting to stimulate the global economy. The European Central Bank last week announced a new set of crisis-fighting measures involving bond purchases to stem the European debt crisis. Also, chatter has been increasing recently that China is preparing to launch a new stimulus plan and cut rates further. Lastly, a survey of economists Wednesday points to the Bank of England once again boosting its quantitative easing program at its next meeting. Overall, continued central bank liquidity growth should support risk markets for the next few months.
The S&P 500 rallied 1.63 percent to close at 1,459.99, the highest close since December 2007 for the index. Also, the Dow Jones Industrial Average closed higher by 1.55 percent with all 30 components seeing gains on the session. The Dow leaders were Bank of America (NYSE: BAC) and J.P. Morgan Chase (NYSE: JPM), rallying 4.79 and 3.71 percent respectively. The NASDAQ jumped 1.33 percent and the VIX fell 11.08 percent.
The benchmark 30-year Fannie Mae yield fell to a record low 2.13 percent as the Fed prepares to buy unlimited quantities of mortgage backed securities.
Alpha Natural Resources (NYSE: ANR) rose 12.1 percent, leading the S&P 500 higher and also rising with materials stocks in general.
Freeport-McMoRan Copper and Gold (NYSE: FCX) was also one of the biggest gainers in the S&P, rising 4.2 percent to $41.79.
O'Reilly Automotive (NASDAQ: ORLY) was the biggest loser in the S&P, falling 4.8 percent on the session.
Warren Buffett's Berkshire Hathaway (NYSE: BRK-A)climbed to a four year high, closing up 2.08 percent.
Apple (NASDAQ: AAPL) shares gained 1.97 percent, one day after announcing updates to its iPhone, iPods, and iTunes marketplace.
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