Bernanke: Fed's actions led to stock rally

NEW YORK (CNNMoney) -- Federal Reserve Chairman Ben Bernanke said the central bank's latest effort to pump money into the economy is partly responsible for the rise in the stock market, but not for the reason critics think.

The stock market rally that began last summer was fueled by the Fed's efforts which improved U.S. economic activity, he said. But critics claim the Fed's policy created a new asset bubble.

Bernanke made the comments at a forum sponsored by the Federal Deposit Insurance Corp., the government agency that backs bank deposits. He was asked by moderator Steve Liesman of CNBC about whether the Fed's announced plans to purchase $600 billion of additional Treasuries, a policy known as quantitative easing or QE2 because it is the second round of such purchases, was driving up stock and commodity prices.

"I do think that our policies have contributed to a stronger stock market, just as they did in March of 2009," he said, referring to the Fed's initial round of quantitative easing.

He pointed out that since he signaled the Fed would likely unveil QE2 during a speech in Jackson Hole, Wy., that the Russell 2000 of small cap stocks is up 30%, even more than the 15% to 20% rise in blue chip indexes.

"A stronger economy helps smaller businesses," he said.

Critics of the Fed say that QE2, by pumping more money into the economy, has driven asset prices higher but done little to improve the economic outlook.

"While QE1 and QE2 have worked wonders on the stock market, their impact on GDP and jobs has been anemic at best," said Madeline Schnapp, director of Macroeconomic Research at TrimTabs Investment Research.

But Bernanke said he believes the economy has picked up. And he said the higher yields on long-term Treasuries, even in the face of the Fed purchases, is a further sign of the better outlook for the economy.

"Interest rates are higher but that's because the news is better, responding to stronger economy," he said.

Bernanke testified before the Senate Budget committee last week that the economy is likely to be "moderately stronger in 2011 than it was in 2010." He clarified that a little bit Thursday, saying he expected growth between 3% and 4%. He also said he was more optimistic about the economy than he was when he gave the Jackson Hole speech on Aug. 27.

"At that time, the economy was looking somewhat shaky and we were somewhat concerned about the sustainability and increased risks," he said. Now, "we are moving in the right direction."