Stocks Climb, Treasuries Erase Gain on Fed Mortgage Plans

U.S. stocks climbed and Treasuries erased their advance as the Federal Reserve said it will buy mortgage securities and keep interest rates “exceptionally low” through the middle of 2015 to bolster the economy.

The Standard & Poor’s 500 Index increased 0.5 percent to 1,443.01 at 12:40 p.m. in New York, its highest level since January 2008. The index hadn’t risen more than 0.2 percent before the Fed statement. Ten-year Treasury yields increased two basis points to 1.78 percent after falling as much as five points earlier. Oil erased gains, decreasing 0.2 percent to $96.80 a barrel after jumping as much as 1.6 percent.

The Fed said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month and hold the federal funds rate near zero “at least through mid-2015.”

“If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate,” the Federal Open Market Committee said today in a statement at the end of a two-day meeting in Washington.

Fed Chairman Ben S. Bernanke called the U.S. unemployment rate, stuck above 8 percent since January 2009, a “grave concern and didn’t rule out further stimulus efforts when he spoke at a gathering of central bankers in Wyoming on Aug. 31.

Previous QE

Previous efforts by the Fed to safeguard the U.S. economic recovery have helped extend a rally in stocks over the last three years. The S&P 500 has rebounded as much as 113 percent from a bear-market low in March 2009 through the end of last week.

The Fed fought the financial crisis by keeping the main interest rate close to zero since December 2008 and through two rounds of quantitative easing. In the first round starting in 2008, the central bank bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.

The actions also helped send rates on U.S. government securities to record lows. The 10-year note’s yield touched an all-time low of 1.38 percent in July, while 30-year bond rates sank as low as 2.44 percent the same month.