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The Honolulu Advertiser
Posted on: Thursday, July 20, 2006

Fed chairman's soothing words spark market rally

By Ellen Simon
Associated Press

NEW YORK Wall Street shot higher yesterday after Federal Reserve Chairman Ben Bernanke soothed investors with his view that economic growth seems to be moderating and inflation remains contained. The Dow Jones industrial average gained more than 210 points, while Treasury bonds recovered from early losses to close sharply higher.

Investors interpreted Ber-nanke's testimony before Congress as a sign the Fed is close to ending its streak of interest rate hikes. Bernanke told the Senate Banking Committee, "We think inflation is going to moderate," and said the Fed's previous policy actions, such as rate hikes, could still affect the economy. However, he hedged the inflation outlook by talking about risks that could send prices higher.

Two government reports indicated the economy is slowing, with core inflation coming in lower than expected and new home construction falling. Strong earnings from International Business Machines Corp., United HealthGroup Inc. and two of the nation's largest banks also bolstered stocks, which slumped last week on intensified violence in the Middle East.

"The market has been in selloff mode," said Jim Herrick, director of equity trading at Baird & Co. "Today, at least, the geopolitical issues are put on the back burner and the focus is on earnings and comments from Bernanke."

The Dow rose 212.19, or 1.96 percent, to 11,011.42.

Broader stock indicators also gained sharply. The Standard & Poor's 500 index rose 22.95, up 1.86 percent, to 1,259.81, and the Nasdaq composite index rose 37.49, or 1.83 percent, to 2,080.71.

The Russell 2000 index of smaller companies rose 20.70, or 3.04 percent, to 702.34.

Advancing issues led decliners by more than 6 to 1 on the New York Stock Exchange.

Bernanke's remarks also sent European stocks up sharply. Britain's FTSE 100 rose 1.69 percent, Germany's DAX index added 2.64 percent, and France's CAC-40 gained 2.37 percent. Earlier, Japan's Nikkei stock average rose 0.44 percent.

The Labor Department said the Consumer Price Index rose by 0.2 percent in June, the smallest increase in four months. But core inflation, which excludes energy and food, rose by 0.3 percent in June, higher than the 0.2 percent Wall Street expected. That increase left core inflation rising for the past three months at an annual rate of 3.6 percent, far above the Federal Reserve comfort zone of 2 percent or less.

Meanwhile, the Commerce Department said construction of new homes softened, falling by 5.3 percent in June, another sign that the once-booming housing market is slowing.

Preliminary consolidated volume on the NYSE was 2.83 billion, up from 2.58 billion at the same time Tuesday.