By Ian Swanson - 08/27/10 09:23 PM EDT
The Dow Jones Industrial average soared above 10,000 Friday after Federal Reserve Chairman Ben Bernanke promised the central bank was ready to ward off a double-dip recession.
Bernanke made no promises for specific action during his highly anticipated speech, but said the Fed’s monetary policymaking committee “will do all that it can to ensure continuation of the economic recovery.”
The Dow Jones closed at 10,150, up 164 points — 1.65 percent — a day after closing below the psychologically important 10,000-point mark.
Markets rose Friday even after a report from the Commerce Department’s Bureau of Economic Affairs that revealed economic growth slowed significantly in the second quarter.
The country’s gross domestic product grew at an annual rate of 1.6 percent, down from the 2.4 percent initially projected this summer.
The 1.6 percent growth was a bit better than some private analysts had expected, but is still a significant fall from the 3.7 percent annualized rate of growth recorded in the first quarter.
The slow growth and continued problems in the housing market suggest the nation’s unemployment rate is unlikely to drop before November’s mid-term election, which is likely to be dominated by voter concerns on the economy and jobs. The Labor Department will issue a new report on jobs in one week.
In his speech at an annual symposium in Jackson Hole, Wyo., Bernanke outlined a series of possible Fed tools to put more money into the economy, including further purchases of longer-term securities and lower interest rates on reserves that banks place with the Fed.
Bernanke did not say any steps were imminent, however. Michael Feroli, an economist with JPMorgan Chase, suggested immediate actions are unlikely.
Instead, Feroli said the Fed is more likely to take action later this year.
“After today’s speech, we remain of the view that the Fed still has what used to be called ‘an easing bias’ but at the same time think they may need to see some more bad data before undertaking additional asset purchases,” Feroli wrote.
Given the “wait-and-see tone” in Bernanke’s speech, JPMorgan expects the Fed might not take any action at its September meeting, though Feroli said such a step should not be ruled out if there is more negative economic data.
Bernanke said the economic slowdown was sharper than the Fed had initially projected, but that increased growth was possible in 2011.
“Despite this recent slowing, however, it is reasonable to expect some pickup in growth in 2011 and in subsequent years,” Bernanke said.
Bernanke said the Fed has several options to boost the economy even with interest rates now near zero.
If the economy is to get a boost, it is much more likely to come from the Fed than from Congress.
While President Obama has pushed for a series of stimulus efforts for small businesses and teachers, Congress appears unlikely to pass any new large stimulus package similar to the $787 billion lawmakers approved early last year given increased concerns about the budget deficit.
Republicans have ripped Democrats for their spending policies, and many Democrats are worried about additional hits to the federal budget.
The Fed recently moved to keep its balance sheet at its current level of about $2 trillion instead of allowing it to contract, which would have removed money from the economy. The Fed said it would reinvest maturing mortgage-backed securities and agency debt in longer-term Treasury debt.
Bernanke said about $400 billion would have matured by the end of 2011, meaning that amount of monetary stimulus would have drained out of the economy without its recent move.