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Investors weigh Bernanke’s latest testimony

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Investors weigh Bernanke’s latest testimony

Federal Reserve Chairman Ben Bernanke had the opportunity to set the record straight Wednesday, following a week of renewed speculation about the future of the Fed’s monetary policy. In a speech that followed last week’s June FOMC meeting minutes, Bernanke told investors that the days of loose monetary policy weren’t over, and that stimulus was still needed to keep economic conditions favourable.

Bernanke’s comments shifted the market’s expectations and sent stocks soaring, as investor sentiment was bolstered on the prospect of uninterrupted stimulus. The stock markets have been heavily supported by monetary easing, which in 2009 helped bring the S&P 500 off 12-year lows.

In a prepared testimony before the House Financial Services Committee on Wednesday, Bernanke’s elaborated on his previous comments by stressing that Fed stimulus was not on a preset course, and that the pace of bond purchases would depend on the status of economic recovery. If the outlook on employment becomes less favourable, if the pace of growth becomes less robust, and if inflation didn’t appear to be moving toward the 2 percent target, the current pace of bond purchases could be maintained longer.

Following the June 10-11 FOMC policy meetings investors took the Fed’s optimism about economic recovery to mean that quantitative easing would soon be winding down, with a complete shutdown of asset purchases as early as 2014. Stocks and commodities tumbled in response to the speculation, and the US dollar soared. However, the response to Bernanke’s latest testimony was far less dramatic.

The US dollar index advanced 0.2 percent on the news, despite weak housing data earlier in the day. US stocks also rose, with the S&P 500 advancing almost 0.3 percent to 1,678.91. The NASDAQ Composite was also up more than 0.3 percent to close New York trade at 3,610.00.

The stock market was also bolstered after Bank of America and Mellon Corp profits beat expectations, sending their shares higher by more than 2 percent. In another earnings report, Yahoo! Inc also topped forecasts, sending its shares up 9 percent.

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