Federal Reserve chairman Ben Bernanke sees no stock bubble

Federal Reserve chairman Ben S. Bernanke said Wednesday he doesn’t believe the central bank is feeding a bubble in the stock market by keeping interest rates near zero.

While the Fed is pleased with recent gains in the market that have catapulted the Dow Jones Industrial Average to record highs and lifted the Standard & Poor’s 500 index to within 4 points of a record in New York trading Wednesday, he said he doesn’t judge the Fed’s success by that measure.

The most important measure for the Fed continues to be the unemployment rate, which at 7.7 percent remains too high, he said at a news conference after the Fed’s rate-setting committee decided to leave its policies unchanged.

“It’s still not a completely satisfactory economic recovery,” he said, telling reporters the Fed will maintain its extremely lenient interest rate policies until unemployment gets closer to 6.5 percent.

Mr. Bernanke addressed growing criticism that the central bank may be inflating a bubble in stocks and other markets by keeping rates too low, enabling investors to take out big loans and drive up the prices on stocks, gold, bonds and other assets to unsustainable levels.

“In the stock market, we don’t see anything that’s out of line with historical patterns,” he said, noting that while stock indexes are at record highs, they remain short of their all-time record valuations after prices are adjusted for inflation.

With corporate profits running at record levels and taking a larger share of corporate income in recent years, the rally in stocks should not be surprising, he said.

“The relationship between stock prices and earnings is not unusual at this point,” he said, referring to current stock valuations that average around 15 times earnings. “The share of income going to profits has been very high.”

The stock market took heart from Mr. Bernanke’s comments and continued its strong rally Wednesday, with the Dow briefly hitting a fresh record high of 14,546 in New York trading before ending somewhat lower at 14,512 for a gain of 56 points. The S&P 500 along with the Dow shrugged off concerns about the fumbled European bailout of Cyprus that hit the market Monday and surged by 10 points to end at 1,559, four points short of a record.

Investors also took comfort from Mr. Bernanke’s assertion that the Cyprus situation holds little danger for the U.S. economy, markets and banks, which he said are likely to remain largely unaffected by the continuing turmoil in Europe.

He noted that the U.S. government has an unblemished record of making investors and savers whole through its guarantee of bank deposits at insured banks, so investors should have no fear of losing their deposits — a concern that has gripped depositors in Cyprus.

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