NEW YORK (AP) — With a few unexpected words, Ben Bernanke triggered a jump in the market.
Stocks shot higher Wednesday as the Federal Reserve chairman spelled out ways that the central bank might act to stimulate the economy if the threat of deflation, or falling prices, reemerges.
Bernanke’s remarks were far from an actual promise for more economic stimulus, but markets reacted immediately nonetheless. The Dow Jones industrial average nearly doubled its morning gains in ten minutes, and the dollar and U.S. government bond prices fell as investors shed lower-risk assets.
The Standard & Poor’s 500 rose 17 points, or 1.3 percent, to 1,331 in midmorning trading. The Dow rose 159 points, or 1.3 percent, to 12,605. The Nasdaq composite rose 43, or 1.5 percent, to 2,824.
In testimony before congress, Bernanke outlined three options the Fed would consider if the economy does not improve. The Fed could buy more government bonds to keep interest rates low. That would be the third such program in two years. It also could cut interest rates the Fed pays on bank reserves to encourage lending, and give a more specific time frame for long it planned to keep short-term interest rates near zero.
Energy and materials stocks rose more than the overall market as investors raised their expectations for U.S. economic growth. All 30 of the stocks in the Dow average rose, led by heavy equipment maker Caterpillar Inc. with a 2.8 percent gain.
Bernanke said he still believed the economic slowdown was temporary. He said high food and gas prices that had been weighing on growth would lower by the second half of the year. He said the Fed was prepared to take action if the economy didn’t improve. Bernanke also laid out specific measures the Fed might take if the economy improves, such as allowing its holdings of long-term debt securities to shrink.
The first indication that new stimulus might be taken came yesterday, when minutes from a meeting of Fed officials showed some favored the idea of taking action.
The Fed chair urged lawmakers to raise the U.S. borrowing limit before Aug. 2. If Democrats and Republicans can’t make a deal by that deadline, the U.S. could fail to pay its debt for the first time in history. More likely than an immediate default, however, is a temporary halt to benefits like social security or military pay.
Stocks started after China reported strong economic growth in the second quarter.
The Chinese economy grew at a slower but still healthy rate of 9.5 percent last quarter, data showed Wednesday. China is attempting to rein in its speeding expansion and ease inflation, but a sudden drop-off in growth could hurt the U.S. economy by cutting into demand for U.S. exports.
Markets improved after fears abated that Italy would default on its debt. The S&P 500 fell 2.9 percent over the past three days as traders worried one or more European countries would fail to pay their debts, causing a global slowdown in lending.
A successful auction of Italian government debt and a pledge by that country’s leaders to accelerate cost-cutting plans reassured markets that Europe’s third-largest economy was not on the verge of following Ireland, Greece and Portugal into needing bailout lending.