Ben Bernanke's Low-Interest News Sends Stocks Soaring

ByABC News
March 26, 2012, 8:40 PM

NEW YORK -- It's hard to build wealth earning 0% to 2% on your money. That growing realization sparked another big rally Monday on Wall Street after the Federal Reserve reiterated that its policy of super-low interest rates was not going away anytime soon.

Investors figuring they can't meet their financial goals by stashing their money in low-yielding assets, such as cash and U.S. Treasury bonds, piled back into riskier stocks in search of larger returns after Fed Chairman Ben Bernanke said in a speech that "continued accommodative policies" are still needed to boost the economy and bring down the unemployment rate.

The Dow Jones industrials soared 161 points to 13,242. The broader Standard & Poor's 500 index gained 1.4% to 1417, extending its 2012 gain to 12.6% and putting it on track for its best first quarter since 1998.

Ever since December 2008, when the Fed slashed short-term rates to roughly 0% during the financial crisis, the availability of cheap money has acted like steroids and helped pump up the economy and markets. The Fed's use of unconventional tactics, including two rounds of government bond purchases to keep rates low — a strategy known as quantitative easing, or QE — has also eased strains.

Some investors interpreted Bernanke's speech as a sign the Fed is keeping the door open to a third round of bond purchases, less than two weeks after the market concluded QE3 was unlikely. Bernanke's speech was viewed bullishly because:

•Low rates make stocks more attractive. Pension funds and 401(k) participants can't get adequate returns in a low-interest-rate world and are essentially being forced by the Fed into assets, such as stocks, with bigger return potential, says Bill Hornbarger, chief investment strategist at Moneta Group.

"Rates at 0% don't get a lot of people where they need to go," he says.

•The easy-money policy is pro-growth. The economy still needs stimulus, whether it comes from the Federal Reserve or Congress, to keep growing, says Timothy Vick, senior portfolio manager at Sanibel Captiva Trust. "The market is looking for continued stimulus, no matter what," he says.

•Fed still seen as backstop. "As long as Bernanke sees risks, the market sees the (liquidity) spigot in the open position and that is all the markets needed to know," says money manager Michael Farr of Farr Miller & Washington. Post-financial crisis, stocks have reacted positively each time the Fed has announced a new plan to support markets.