Stocks turned higher Friday, erasing early losses, after Federal Reserve Chairman Ben Bernanke spoke optimistically about long-term prospects for the U.S. economy.
Indexes fell sharply in the minutes after Bernanke’s speech started at 10 a.m. but recovered those losses within an hour. By late morning major market indexes were all trading higher.
Many traders were disappointed that the Fed chairman offered no new steps to hasten the fragile economic recovery. Optimism had been building on Wall Street this week that Bernanke might announce some kind of action. Bernanke was speaking at a conference in Jackson Hole, Wyo., the same event where he announced plans for a bond-buying program a year ago.
Markets reacted immediately once it was clear Bernanke was not promising new stimulus measures. The Dow Jones industrial average was down about 78 points shortly before the speech started and slumped as many as 220 points shortly after Bernanke started speaking.
By late morning the Dow was up 69 points, or 0.6 percent, 11,219 in late morning trading. The Standard & Poor’s 500 index rose 10, or 0.8 percent, to 1,169. The Nasdaq composite index rose 41, or 1.7 percent, to 2,440.
In his speech, the Fed chairman focused on the long-term strengths of the U.S. economy, saying that they “do not appear to have been permanently altered by the shocks of the past four years.”
That shot of optimism helped lift markets.
“In the American economy, the only thing that’s really lacking right now is confidence,” said David Kelly, chief market strategist at JPMorgan funds. Kelly said the Fed has few remaining options to help the economy, but action by the central bank might not be necessary.
“People who understand the limits of monetary policy also understand that the economy has what it takes to grow,” Kelly said.
Underscoring how fragile the U.S. economic recovery is, early Friday the government lowered its already weak estimate for how fast the economy grew in the April-June period. That report was another factor pushing stocks lower.
The Commerce Department estimated that the U.S. economy grew at an annual rate of just 1 percent in the second quarter. That’s even worse than its previous estimate of 1.3 percent.
The data renewed concerns that the U.S. might be headed for another recession. Nine of the past 11 recessions since World War II have been preceded by a period of growth of 1 percent or less.
The Fed has already pledged to keep short-term interest rates low until mid-2013. Low rates make higher-risk bets such as stocks more attractive. At last year’s conference in Jackson Hole Bernanke signaled that the central bank would buy more government bonds to lower long-term interest rates. Stocks rose steadily during the period when the Fed bought up $600 billion of Treasurys.
The government lowered its estimate for economic growth in the April-June quarter because of fewer exports and weaker growth in business stockpiles. That means the economy expanded only 0.7 percent in the first six months of the year, its worst pace since the recession ended in June 2009.
The yield on the 10-year Treasury note fell to 2.21 percent from 2.24 percent late Thursday. Bond yields fall as their prices rise.
Demand for Treasurys has been strong in part because of instability in Europe.
Germany has balked at proposals to bulk up bailout efforts for Greece, Portugal and Ireland. A group led by Finland is demanding collateral on the bailout loans to Greece, highlighting growing policy divisions among countries that use the euro. Greece can’t afford to set aside collateral for every nation participating in the bailout. Finland’s move could scuttle the plan.