Global Stock Markets Rise, Fed Maintains Loose Monetary Policy

Global stock prices rose last week for the third consecutive week, as investors were encouraged by the unexpected decision of the Fed to keep monetary policy unchanged until the economic situation improves further.

On Wall Street last week, the Dow Jones increased by 0.6 percent to 15,451 points, while the S&P 500 rose by 1.3 percent to 1,709 points, and the Nasdaq index by 1.4 percent to 3,774 points.

Until Wednesday, trading on global stock markets was cautious, and when the U.S. central bank announced that the programs for purchasing government and mortgage bonds, worth $85 billion per month, would remain unchanged, euphoria took over the markets.

On Wall Street that day, the Dow Jones and S&P 500 indices reached all-time highs as the Fed’s maintenance of extremely loose monetary policy pleasantly surprised investors who expected a reduction of these programs by $10 billion per month.

“There is no reduction in stimulus, the market loves it. From a short-term market perspective, it is good that the Fed continues with generous stimulus. However, regarding the real economy, it is clear that the Fed is concerned about slow growth,” says Brad McMillan, director at Commonwealth Financial.

At a press conference held after a two-day meeting of central bank leaders, Fed Chairman Ben Bernanke stated that the very loose monetary policy would remain in place until data confirms that the economy is firmly on the path to recovery.

That the U.S. economy is not in impressive shape is also indicated by the reduced Fed forecasts. Thus, this year the central bank expects economic growth between 2 and 2.3 percent, while three months ago it expected growth between 2.3 and 2.6 percent.

The reduction in growth forecasts is not good news, but analysts say it seems that the Fed will pursue an accommodative monetary policy until growth accelerates.

This has also encouraged investors with reports that Fed Vice Chair Janet Yellen is the White House’s favorite for the position of central bank president, after Lawrence Summers, the former Treasury Secretary, withdrew from the candidacy.

Yellen is more favorable to the markets as she has advocated for very loose monetary policy until unemployment is significantly reduced, so investors hope she will continue Bernanke’s policy when he steps down from the presidency in January next year.

However, investor enthusiasm did not last long, as stock prices fell in the last two days of last week.

While maintaining loose monetary policy means that the Fed will continue to inject fresh, cheap money into financial markets to keep interest rates low and thus stimulate lending, the Fed’s reduction in growth forecasts shows that the limits of such policy are constrained.

European stock prices also rose last week. The London FTSE increased by 0.2 percent to 6,596 points, while the Frankfurt DAX jumped by 1.9 percent to 8,675 points, and the Paris CAC by 2.2 percent to 4,203 points.

On the Tokyo Stock Exchange, the Nikkei index rose by 2.3 percent last week to 14,742 points, marking the third consecutive week of growth.