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Chairman of the Federal Reserve Ben Bernanke listens to a question about personal finance education while speaking to educators at the Federal Reserve Building in Washington, August 7, 2012.Bernanke said on Tuesday that a population that better understands financial concepts will help the nation withstand financial shocks. (Larry Downing/Reuters)

Chairman of the Federal Reserve Ben Bernanke listens to a question about personal finance education while speaking to educators at the Federal Reserve Building in Washington, August 7, 2012.Bernanke said on Tuesday that a population that better understands financial concepts will help the nation withstand financial shocks.

(Larry Downing/Reuters)

Stocks jump after Fed announces stimulus Add to ...

The Fed has spoken, and markets have reacted: Stocks jumped after the Federal Reserve released its monetary policy report on Thursday afternoon.

Within minutes of the release, the S&P 500 was up 8 points after being up less than 1 point prior to the release. Canada’s S&P/TSX composite index was up 24 points, after being down about 30 points.

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And markets are extending gains as the Federal Reserve press conference gets underway, with the S&P/TSX now up 119 points, or nearly 1 per cent, and the S&P 500 up 21 points. The Dow Jones industrial average is up 185 points, or 1.4 per cent, and the Nasdaq is up 44 points.

Gold saw some of the biggest gains given thoughts the stimulus may stoke inflation, with gold for December delivery in New York closing up $38.40, or 2.2 per cent, at $1,772.10 an ounce.

The Fed announced it would initiate open-ended purchases of $40-billion of mortgage securities each month. It also extended its commitment to keeping its key interest rate exceptionally low, to mid-2015 from a previous commitment of late 2014. And, it said it would extend its so-called Operation Twist – buying long-term bonds and selling shorter-term bonds – through the end of the year.

There could be more to come: “If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate,” it said in its statement.

Now, investors must weigh the fact that the central bank is worried about the health of the U.S. economy against the fact that it is trying to do something about it. If Fed actions are viewed as being useful, then stocks should rally. But if markets get skeptical about whether the Fed can do much to prevent this current bout of sluggishness, look out.

Follow on Twitter: @dberman_ROB

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