NEW YORK — Nearly everything is going according to the plan Federal Reserve Chairman Ben Bernanke hatched six months ago.
During a speech in Jackson Hole, Wyo., on Aug. 27, Bernanke outlined an effort to spur economic growth, prevent prices from falling and push markets higher through the purchase of government bonds. Since then, stocks have soared, the unemployment rate has dropped and Americans have started to spend more.
“It’s been a success,” says Bill Gross, who manages the world’s largest mutual fund at Pimco. Gross had skewered Bernanke’s plan, comparing it to a Ponzi scheme. “It’s hard to dispute that, since Jackson Hole, the market is up around 25 percent.”
But the Fed’s $600 billion program to buy Treasurys ends in June. Gross and other investors are concerned the stock and bond markets will fall without the Fed’s $75 billion monthly injection.
“At the end of June, the biggest bond buyer steps away,” he says. “The markets could have a shock in store.”
The move, which began in November, was unorthodox, but the logic was simple: Buying $600 billion in Treasurys would make borrowing cheaper and move investors out of low-yielding bonds into riskier investments such as stocks. A rising stock market could give Americans confidence in the economy and spur consumer spending, which leads to higher corporate profits.
A lot has happened in the markets and the economy since then — most of it good.
“Measured in the fairest possible way, and by just about every measure, QE2 has succeeded so far,” says Anthony Chan, chief economist at JPMorgan’s wealth management unit. QE2 is market slang for the Fed’s quantitative easing program.
Long-term interest rates are the exception. They were on a steady climb until the recent turmoil in Egypt and Libya pulled them lower. The benchmark 10-year Treasury rate recently hit 3.50 percent.
That’s up from 2.49 percent Aug. 26. But rates fell after the Jackson Hole speech and then began rising on each bit of good news about the economy. Economists say that’s how it’s supposed to work. Interest rates typically rise during an economic recovery to compensate bond holders for the negative hit from inflation.
But it’s another story if rates jump too quickly. A common worry among investors is that the Fed proves too successful in pushing up prices and inflation gets out of control, leading to a spike in rates.
