Stocks surge after Fed announces new stimulus

(CBS/AP) NEW YORK - U.S. stocks surged Thursday after the Federal Reserve unveiled a long-awaited package of aggressive steps to spur economic growth. The Dow Jones industrial average jumped more than 200 points to its highest point since the start of the Great Recession.

The central bank said it would spend $40 billion a month to buy mortgage securities because the economy is too weak to reduce high unemployment. It said it would keep buying bonds until the job market shows substantial improvement.

The help was open-ended. The central bank also extended its pledge of near-zero interest rates into 2015, and promised to keep "highly accommodative" monetary policy in place even after the economic recovery strengthens.

Fed to spend $40B a month on bond purchases
Why did the Fed act now to boost the economy?
CBS MoneyWatch primer on "quantitative easing"

It was the action investors had been hoping for. "They're saying that the punch bowl, the fuel for the economy, isn't going away - it's going to be here as long as you need it," said Tony Fratto, a former aide to President George W. Bush and managing partner at Hamilton Place Strategies, a policy consulting firm in Washington.

The Dow closed up 206 points, or 1.6 percent, at 13,540. Previously, the index had last breached the 13,500 level in December 2007, the first month of the recession. The broader Standard & Poor's 500 index rose 23 points to 1,460, and the Nasdaq composite index was up 43 points at 3,156.

David Abuaf, chief investment officer at Hefty Wealth Partners, said the Fed package was just what the economy needed.

He said he expects investors to keep shifting from safer assets like government bonds to stocks. That could push stock prices higher, kicking off a cycle of increased wealth and increased spending.

"People will feel more confident, consumers will buy more goods and GDP growth will increase," he said, referring to the gross domestic product, or economic output.

The stock market had already enjoyed a summer rally, in part because investors were betting on more Fed action. The Dow has climbed about 1,100 points since the start of June.

Still, stocks spiked Thursday in industries across the economy. Materials companies, which tend to do well when the economy picks up, enjoyed the biggest gain -- 2.4 percent as a group. Bank stocks also surged.

This is the third round of bond-buying by the Fed since the financial crisis struck in the fall of 2008. The goal is to lower long-term interest rates, get people to borrow and spend more and push them into stocks.

If history is any guide, stocks could rally a bit more. In the three months following March 2009, when the Fed said it would expand its first round of buying, the S&P 500 rose 18 percent. In the three months after the central bank hinted at a second round of buying in August 2010, the S&P rose 14 percent.

Some economists and investors have warned that the bond-buying will have a limited impact because interest rates are already near record lows.

The yield on the benchmark 10-year Treasury note fell slightly to 1.77 percent from 1.79 percent late Wednesday. It had spiked to 1.84 percent as investors sold bonds after the Fed announcement.

The dollar fell slightly against major currencies, and the price of gold climbed to its highest level since February.

Investors were also keeping an eye on turmoil in the Middle East. Protesters stormed the U.S. Embassy compound in Yemen's capital Thursday, and there was more violence around the U.S. mission in Cairo. The U.S. ambassador to Libya was killed Tuesday.

In other news Thursday, the Labor Department reported that the number of people seeking unemployment benefits jumped last week to the highest level in two months, though the figures were skewed in part by Hurricane Isaac.

The government also said that wholesale prices rose 1.7 percent in August, the most in three years. They were driven up by higher costs for gas and food. Removing the impact of energy and food, however, the increase in prices has been mild.

The Fed action combined with the Middle East turmoil pushed crude prices slightly higher. Oil was up 42 cents, or 0.5 percent, at $97.43 on the New York Mercantile Exchange.

[lonestar9000]

So people will buy more consumer goods, eh? With what? I would think that Business 101 would tell companies that you can't sell stuff to people who have no money because they have no jobs, and have no jobs because they were all outsourced.

[dorsano]

A central bank acting as a central bank - thankyou Alexander Hamilton

[aintfakin]

MicahStone September 13, 2012 6:57 PM EDT
In other words, the irresponsible, treasonous actions of bailout bernanke and his feckless Fed (aka, a taxpayer-funded OBOZO-supporting Political Action Committee) help only BIG BANKS, Wall Street and the 1%-ers, while posing significant future harm for the poor and the middle class.
-----------------------------------------
yeah
Romnee aint gonna help those big banks....right?
well maybe just the ones in the Caymans
never surprised at how blind (or hypocritical) some people can be

[washmohickory]

It's simply printing money no matter how they try to sell it. Here is one place Obama could tell us the hard truth like he promised and stop calling this quantitative easing.

[Jhihmoac]

"The central bank said it would spend $40 billion a month to buy mortgage securities because the economy is too weak to reduce high unemployment. It said it would keep buying bonds until the job market shows substantial improvement..."

I'm no economics-minded individual, but that sounds like a sugar-coated definition of "bailout" to me :P

[theZengerite]

The Stimulus & Omnibus Bills, The Twist, cash for clunkers, cash for caulkers, $8K as new home credit, billions of dollars in green job money, QE1, QE2. and now QE3. The result: banks still aren't lending and there are fewer net jobs now, than when the Obama administration took over, even after the population grew by 8.8 million Americans since January '09.
QE3 is ridiculous and deserves a dose of ridicule through a "lash of satire": QE3 is nothing more than gov't Viagra. Bernanke is pumping more gov't Viagra into the system even though any growth that previous stimulation (from gov't intervention) might have forced, disappeared when it ran out. All that is left in the end is the bill for the gov't Viagra which will be passed on to the "fat cats" as well as the middle class, American tax payer.
What is needed is fiscal sanity, not gov't Viagra!

[krisd999-2009]

Another bailout TARP2- the banks and GSEs sell their crap mortgages to the FED. The money they get still can't be lent out for new mortgages because the same problem of no one having the downpayment/income to borrow is still there. People are still overloaded with debt. The banks will just use it to park it back at the FED at interest or use it for short term speculation with oil,corn and other commodities driving up the prices, or just buyng government bonds and collecting the interest. Our mortgage payments will be going to the FED, so the money will be gradually disappearing from the economy again...enabling them to keep inflation from getting out of hand. Simply, another stealth bank bailout..with a lot of hype that something is being done-con game.

[CaptainSmollett]

This desperate move by the Fed is a clear indication of the abysmal condition of our economy. Every senior and Boomer should recognize that this Fed action is not without consequences, and you are the key demograhic that will pay the price. A very big price, indeed!

[REI9N]

Okay heres one idea to help boost economy and creating jobs...why don't you start taxing American companies that decided to use NAFTA so they could get stuff made cheaper in other places and then send it here and try to get higher prices for it. The problem is if they take away peoples jobs by moving to some other country then why are they so greedy to keep the prices the same if lesser Americans are working thanks to them. I think the only reasonable choice is to even this out is tax those companies alot. Even it up to where keeping the jobs here is a more suitable and reasonable choice. Yea there is the possibility those companies will in turn raise their prices. So my idea is not flawless. We need to keep companies here any company that moves to another country is to help people get jobs and to make money not only in that country but over here as well. Its not helping the US or the families or the economy here so something needs to be done period.

[TimeToStepUp]

Agree - repeal NAFTA. It was very controversial but did passed. It did NOT do as intended... Bush started it but Clinton passed it ... They're equally at fault...
With much consideration and emotional discussion, the House of Representatives approved NAFTA on November 17, 1993, 234-200. The agreement's supporters included 132 Republicans and 102 Democrats. NAFTA passed the Senate 61-38. Senate supporters were 34 Republicans and 27 Democrats. Clinton signed it into law on December 8, 1993; it went into effect on January 1, 1994. Clinton while signing the NAFTA bill stated that "NAFTA means jobs. American jobs, and good-paying American jobs. If I didn't believe that, I wouldn't support this agreement."

[LibMel]

It is my understanding that this action is the Federal Reserve buying our own bonds. Our government is purchasing debt. This cannot be good for the overall economy. I know the stockmarket is up, but it goes up and down every week. This just does not seem to be a productive step, particularly for the dollar past the next few months and longer.

[TimeToStepUp]

If other world currencies become stronger before the dollar it will cause us much ongoing pain.

This is a bandaid not a fix ... Really old guys (that's anybody older than me ;-))) used to call this an Ally Oop play (we can't say Hail Mary play any more).