Markets Respond to Federal Reserve's $600 Billion Economic Recovery Plan

Elections have consequences.

It's not just the Fed that's driving this, "Dow Hits Pre-Crisis Level: Central Bank's Spending Binge Stokes Global Rally; 'Don't Fight the Fed'."

Global financial markets cheered the Federal Reserve's plans to spur the U.S. economy Thursday, driving commodity and bond prices higher and propelling the Dow Jones Industrial Average to levels last seen before Lehman Brothers collapsed two years ago.

Interest rates and the dollar tumbled in response to the Fed's decision Wednesday to buy $600 billion of U.S. Treasury bonds, helping fan fresh rallies in oil, gold and Asian stock markets. Major U.S. companies including Coca-Cola Co. and Dow Chemical Co. raced to take advantage of the low rates, selling at least $12 billion of new debt.

But the Fed's buying binge raised alarms, too: Officials in Brazil and South Korea criticized the move, saying it could spark inflation in their economies.

The Dow industrials leapt 219.71 points, or 2%, to 11434.84, its highest close since Sept. 8, 2008, just before the Lehman bankruptcy filing triggered the most intense phase of the financial crisis.

The blue-chip index is now up 75% from its March 2009 low. But the Dow needs a 24% gain to get back to its all-time high, set in October 2007, a stark illustration of the damage caused by the crisis and the long road the economy still must travel.

The Fed's "quantitative easing" policy, unveiled Wednesday, is designed to bolster the economy by keeping credit easy. The Fed is trying to keep rates on relatively safe Treasurys and cash so puny that investors will be enticed into riskier assets such as stocks, commodities and corporate bonds, helping inflate their prices.

The background, with the political angle, at NYT, "Fed to Spend $600 Billion to Speed Up Recovery":

The Federal Reserve, getting ahead of the battles that will dominate national politics over the next two years, moved Wednesday to jolt the economy into recovery with a bold but risky plan to pump $600 billion into the banking system.

A day earlier, Republicans swept to a majority in the House on an antideficit platform, virtually guaranteeing that they would clash with the Obama administration over the best way to nurture a fragile recovery.

The action was the second time in a year that the Fed had ventured into new territory as it struggles to push down long-term interest rates to encourage borrowing and economic growth. In a statement, the Fed said it was acting because the recovery was “disappointingly slow,” and it left the door open to even more purchases of government securities next year.

The Fed is an independent body, its policy decisions separated from the political pressures of the day. But it acted with a clear understanding that the United States, like many other Western countries, seems to have taken off the table many of the options governments traditionally use to give their economies a kick, particularly deficit spending.

The Republicans regained control of the House for the first time in four years in part by attacking the stimulus plan — begun by the Bush administration and accelerated by President Obama — as a symbol of government spinning out of control, contributing to a dangerously escalating national debt.

This political reality has left Washington increasingly reliant on the Fed to take action, though its chairman, Ben S. Bernanke, has said the Fed cannot fix the problem alone.

Mike Pence is not happy.