Stocks Ascend as Bernanke Defends Fed Action

Stocks are off to a healthy start in the first hour of trading despite news from the labor market that jobless claims were rising. Meanwhile, Fed Chairman Ben Bernanke defended the central bank’s role in Bank of America’s acquisition of Merrill Lynch, stating that the Fed acted with the “highest integrity” throughout the process.

The Nasdaq is leading with a 0.92% advance in 1809, while the Dow has climbed 0.66% to 8354, and the S&P 500 is up 0.61% to 906.

Data driving the market gains was mixed.

The good news: First-quarter GDP contracted 5.5%, a slightly slower pace than the previous estimate of -5.7%. 

“Most of the upward revision was due to larger than previously estimated contribution from net exports, a smaller than estimated decline in government spending, and a smaller draw-down in inventories,” said Nariman Behravesh from IHS Global Insight.

He added: “All the incoming data suggest that economic activity contracted at a much slower rate in the second quarter—2.5% to 3%—and that the trough of this cycle is likely to occur sometime in August or September.” 

The bad news: Jobs continue to vanish. The weekly labor report said initial jobless claims rose to 627,000 last week, marking the 21st straight week that claims have been above the 600k threshold. 

As any figure above 400k is considered recessionary, the report suggests that a turnaround in the labor market is still far off. President Obama conceded as much on Tuesday when he said it is “pretty clear now” that the unemployment rate will rise to more than 10%.

“While it appears that initial claims peaked in late March/early April, we have yet to see a decisive move below 600,000 that would corroborate other economic data in suggesting that the recession is coming to an end,” said analysts at RDQ Economics.

Then at 10:00, Fed Chairman Ben Bernanke testified to the House Oversight Committee, responding to allegations that the Federal Reserve pressured Bank of America to complete its purchase of Merrill.

“The decision to go forward with the merger rightly remained in the hands of Bank of America's board and management, and they were obligated to make the choice they believed was in the best interest of their shareholders and company,” Bernanke said. “I did not tell Bank of America's management that the Federal Reserve would take action against the board or management if they decided to proceed with the MAC [Material Adverse Event clause]”.

Bernanke said invoking the MAC would have involved serious risks to both financial institutions as well as the system as a whole, but while the period was “one of extreme stress in financial markets,” the Fed did not overstep or abuse its authority. 

“In retrospect, I believe that our actions in this episode, including the development of an assistance package that facilitated the consummation of Bank of America's acquisition of Merrill Lynch, were not only done with the highest integrity, but have strengthened both companies while enhancing the stability of the financial markets and protecting the taxpayers,” the Chairman added.

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