Traders appeared to be reacting in particular to Tuesday's remarks by Alan Greenspan, chairman of the Fed, in which he hinted that interest rates may be allowed to stabilise amid growing signs that last year's rapid economic growth may be subsiding.
Fearful that surging growth, falling unemployment and low inventories would trigger new inflationary pressures, the Fed raised interest rates seven times in the past year, doubling short-term rates. Mr Greenspan's remarks suggested, however, that the Fed may have succeeded in curbing inflationary impulses as well as slowing growth and preparing the economy for the holy grail of a soft landing.
Mr Greenspan said he expected growth this year of between 2 and 3 per cent, down from 4 per cent in 1994.
The blue-chip index penetrated the psychologically important 4,000 level after less than an hour of trading yesterday and by late morning was up by more than 40 points on the day. The bond market was also higher, with the US 30-year bond up than half-a-point early on.
Some analysts expressed confidence that the rally should be sustainable, with the Dow perhaps staying above 4,000 for some time. "As long as the economy doesn't show signs of uncalled for strength, we're okay," said John Manley, managing director of Smith Barney. "Mr Greenspan has done a very good job. This is the perfect environment for stocks."
Joe Battipaglia, of investment bankers Gruntal Co. similarly predicted that the upward trend on the Dow would continue. "I suspect this is starting something bigger," he said.
The prospect of steady, or eventually even falling US rates, had a less favourable effect on the dollar yesterday, which sank against both the yen and sterling.Reuse content