How Long Can the Fed Be a Hero?
Superhero movies usually include a disturbing phase when the savior-figure becomes overwhelmed by opposing forces. But, right now, the market sees no such upset for Brilliant Ben and the Fantastic Federal Reserve, as they continue their rescue of the U.S. economy.</br></br>Mr. Bernanke's extraordinary policies have undeniably succeeded in persuading investors to plow their cash hoard into riskier assets. The S&P 500 has leapt a staggering 43% in a year. Junk bonds currently yield 5.85 percentage points more than adjusted Treasury yields, according to Bank of America. That's far tighter than the 9.61 percentage points seen nine months after the 2001 recession.</br></br>Indeed, only 18 months after debt markets shut down completely, companies now seem to believe that they will be open indefinitely. For instance, Fitch Ratings recently noted that corporate borrowers have started to wait to renegotiate expiring credit facilities, believing they'll get better terms in the future.</br></br>The bull thesis is seductive. The easy money is creating self-sustaining growth in the real economy that will in turn provide the earnings needed to keep stock and bond prices rallying. And if first-quarter earnings exceed expectations, the upswing will likely continue.</br></br>What's obvious, though, is that investors are giving little credence to the idea that the Fed could slip up. Such trust might yet prove justified. A double-dip recession doesn't look imminent. Meanwhile, the market can take comfort from the fact that the Fed hasn't allowed a serious inflation break-out since the 1970s.