Stock Markets Surge on Fed's $600B Plan

Nov. 4, 2010— -- Stocks surged today after Wednesday's announcement that the Federal Reserve will purchase $600 billion worth of Treasury securities to boost the stagnant economy.

The S&P 500 stock index rose 1.9 percent to its highest since the start of the financial crisis in September 2008, when Lehman Bros. collapsed. The Dow Jones Industrial Average surged 219 points or 2 percent as of its 4 p.m. close. Markets around the world rallied on hope that the Federal Reserve can somehow return jobs and investment to pre-crisis levels.

The most direct effect of the Fed's move will be on interest rates and consumers' investments.

This is the Fed's main tool for changing monetary policy. The Fed is going to print more money, thereby making money cheaper to borrow and interest rates lower.

"One could argue that interest rates are too low already and Treasury prices are too high," said James O'Sullivan, chief economist with MF Global.

Lower interest rates also could lead to lower mortgage rates for consumers looking to buy a home. Consumers who couldn't afford to borrow money or didn't want to borrow money now have greater incentives to do so at lower rates. With more people buying homes, the prices of homes could increase and lead to a boost to the housing market.

For consumers with investments in the financial markets, a large purchase like the Fed's, which will take place at a pace of about $110 billion per month until June 2011, theoretically should encourage investors to place their money in places with higher risk and returns, like the stock market, instead of low-yielding bonds, for example.

As those assets increase in value over time, that means a better stock market and potential gains in wealth for people who own stock for retirement or general purposes.

"They expect this to have a positive impact from lower interest rates and they think it will induce bankers to lend more money, but that's an unsupported premise," said Bill Bartmann of Bartmann Enterprises. "There's a lot of supply but no demand. This will not increase demand if the rate is so shockingly low already."