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World stock markets rally on Fed move

by Jorge Hernandez on November 4, 2010

World stock markets surged this morning after the U.S. Federal Reserve's announcement that it will pump $600 billion into the U.S. economy, reports The Guardian.

In an attempt to revive the country's sluggish economy, the Fed announced yesterday a second round of quantitative easing in which it will buy $600 billion in government bonds over the next eight months.

Leading share indexes were up more than 1 percent in midday trading. The FTSE 100 index of leading British shares were up 1.9 percent, Germany's DAX rose 1.6 percent and the AC-40 in France was up 1.9 percent, according to Today Online.

Dow Jones closed up 26.41 points last night, its highest level in two years. Wall Street is expecting it to rise higher even higher when it opens today.

Analysts had predicted the Fed to pump $500 billion but including the Fed's reinvestment of maturing debt, the total program will come to over $850 billion.

Some are surprised by the Fed's decision, stating such a move – similar to the Fed's first round of quantitative easing in 2008 – usually occurs when the economy is in a much worse state. "The justification for it seems to have utterly changed… It's really policy on the hoof, trying to justify it as they go along." Rob Carnell, chief international economist at the banking group ING, told the BBC.

Ben Bernanke, the Fed's chairman, wrote an op-ed in The Washington Post responding to criticism of QE2. Citing a risky inflation rate, high unemployment and slow economic growth, he claimed that the Fed's support was needed. "This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth," Bernanke stated.

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