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Raging bull

Money | Easy money from the Federal Reserve pushes the stock market higher

Issue: "After Osama," May 21, 2011

It took two full years plus 34 more trading days, but the S&P 500-a stock index tracking hundreds of the largest companies in the United States-hit an important milestone April 27, doubling from its bear-market March 2009 low. Smaller companies, meanwhile, continued to run ahead of the larger ones: The Russell 2000 index of smaller firms closed at an all-time high, topping its previous peak reached in July 2007. The best performance came from the technology-dominated Nasdaq index, which rose to its highest level since 2000.

Why have stocks kept rising? "With the Fed still fostering easy money, and many major companies reporting robust first-quarter earnings, that has been enough for the market to overcome a long list of legitimate [investor] concerns," the Los Angeles Times' Money & Company blog observed. Among those concerns: rapidly rising crude oil prices and credit tightening by foreign central banks.

Precious metals also continued to move skyward. Gold-typically considered a hedge against a weakening U.S. dollar-rose to fresh record highs in late April (above $1,520 an ounce), as the dollar fell to its lowest level since August 2008 against six other major currencies. Silver also hit new records, marking a nearly 50 percent increase since the first of the year.

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Analysts said the Federal Reserve juiced the latest metals moves with an announcement that it would be making no near-term moves to raise interest rates. Low rates drive investors to riskier assets-such as commodities-in search of higher returns. The increased investments tend to push up prices for those assets.

The Fed also announced it will stick to its previously announced timetable and discontinue-at the end of June-a controversial policy of trying to stimulate the economy through the purchase of $600 billion in Treasury bonds. Critics say the policy has helped stoke inflation.

Slow growing

Facing headwinds from bad weather and surging gas prices, U.S. economic growth slowed sharply in the first three months of the year. The Commerce Department estimated that America's gross domestic product grew at a 1.8 percent annual pace during the January-March period, considerably weaker than the 3.1 percent growth rate of the final quarter of 2010.

The GDP report also showed a significant uptick in the cost of living. A jump in oil prices-along with rising costs for corn, wheat, and other commodities-helped push the price index for "gross domestic purchases" to an annual growth rate of 3.8 percent, nearly double the 2.1 percent rate notched near the end of 2010. Excluding food and energy prices-typically the most volatile expenses for consumers-the price index rose at a 2.2 percent annual rate.

At the Fed's first-ever news conference, Fed Chairman Ben Bernanke said he expects recent price spikes to moderate, so the Fed isn't planning any immediate action to try to impede inflation. In advance of the first-quarter GDP report, the Fed lowered its projection of economic growth for the year. The Fed is now projecting the economy to grow between 3.1 percent and 3.3 percent this year, rather than the 3.4 percent to 3.9 percent estimated in January.

Joseph Slife
Joseph Slife

Joseph is the senior producer of WORLD Radio and the co-host of The World and Everything in It.


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