May 10 (Bloomberg) — Ben S. Bernanke's $600 billion strikeagainst deflation is paying off, as stock and debt markets rise,bank lending grows and economists forecast faster growth.

The Standard & Poor's 500 Index has gained 13.5 percentsince the Federal Reserve chairman announced on Nov. 3 the plan tobuy Treasuries through its so-called quantitative easing policy.Government bond yields show investors expect consumer prices torise in line with historical averages. The riskiest companies areobtaining credit at the cheapest borrowing costs ever and Fed datashow that commercial and industrial loans outstanding are risingfor the first time since 2008.

“Looking at market indicators, you have to be convinced it'sbeen a success,” said Bradley Tank, chief investment officer forfixed-income in Chicago at Neuberger Berman Fixed Income LLC, whichoversees about $83 billion. “When you get into periods ofaggressive central bank easing, and we're clearly in the mostaggressive period of easing that we've ever seen, the markets tendto lead the real economy.”

The Fed said last month it won't need to extend the $600 billionbuying program beyond its scheduled end next month. Payrollsexpanded by 244,000 in April, the biggest gain since May 2010,after a revised 221,000 increase the prior month, the LaborDepartment said May 6. The jobless rate climbed to 9 percent, thefirst increase since November, a separate survey of householdsshowed.

'Stopped the Hemorrhaging' “We are starting tosee the impact, albeit slowly,” said Jim Sarni, managing principalin Los Angeles at Payden & Rygel, which oversees more than $55billion in fixed-income assets. “The unemployment rate has slowlystarted to come down. We have a long way to go, but at least itstopped the hemorrhaging.”

Bernanke's quantitative easing program, dubbed QE2 by analystsand investors because it followed an earlier round of $1.7 trillionin bond purchases in 2009 and the first quarter of 2010, wascriticized by officials around the world.

Chinese Premier Wen Jiabao said that the policy would fosterfinancial instability and asset bubbles. Six days after the Fedsuggested at its Sept. 21 meeting that it was ready to start buyingTreasuries, Brazilian Finance Minister Guido Mantega saidgovernments were engaging in a “currency war.” German FinanceMinister Wolfgang Schaeuble called the asset- purchase program“clueless” on Nov. 5 and suggested it was designed to erode thevalue of the U.S. dollar.

Fighting Deflation Back in November, thebiggest concern for the Fed was preventing a general decline inprices, which can paralyze an economy by hindering investment, asthe jobless rate held at 9.5 percent or higher for 14 months. Coreconsumer prices rose 0.6 percent in October from a year earlier,the smallest gain since records began in 1958, government data atthe time showed.

“Measures of underlying inflation are somewhat low, relative tolevels that the Committee judges to be consistent, over the longerrun, with its dual mandate” of promoting full employment andcontaining consumer prices gains, the central bank's Federal OpenMarket Committee said in a Nov. 3 statement.

Since reaching a 20-month low of 2.18 percent in August, a bondmarket measure of inflation expectations the Fed uses to helpdetermine monetary policy has risen to 2.87 percent. The five-yearforward breakeven rate projects what consumer price increases maybe beginning in 2016, smoothing blips in inflation expectationsfrom swings in oil prices and other temporary events.

Controlling Inflation The gauge is down from3.28 percent in December even with energy and food costs reachingrecord highs in a sign that investors expect Bernanke will be ableto withdraw the unprecedented stimulus before inflation gets out ofhand. The current level compares with the average of 2.71 percentin the five years before credit markets seized up in 2008. The coreinflation rate has increased to 1.2 percent.

“We've seen a bit of a lift in breakeven inflation rates, butit's not dramatic,” Tank of Neuberger Berman said.

The Fed's policy of pumping cash into the financial marketsrisks longer term damage, according to Bruce Bittles, chiefinvestment strategist at Milwaukee-based Robert W. Baird & Co.,which oversees $85 billion. He compared the Fed's current policy tothe one it adopted following recession of 2001-2002, when policymakers slashed its target rate to 1 percent in 2003 to spark thehousing market and the economy.

“It was a failure,” Bittles said. “I don't think it's veryhealthy to artificially boost stock prices. What are the long-termconsequences of that? We don't know. The Fed did this with housingback in the last decade, and the unintended consequences were adisaster.”

Dollar Depreciation QE2 has contributed to an11.9 percent decline since August in the dollar based on BloombergCorrelation-Weighted Indexes, which measure its performance againstnine of the most-traded currencies in the world, including theeuro, yen and pound.

Gold and silver reached records in April as investors sought tohedge financial assets against the weakening dollar andaccelerating inflation. Gold advanced 25.8 percent in the pastyear, while silver more than doubled as investors increased theirholdings in exchange-traded products to a record 15,518 metric tonson April 26.

Rising commodities may be restraining the economy. The CommerceDepartment said April 28 that the gross domestic product rose at a1.8 percent annual rate in the first quarter after a 3.1 percentpace in the final three months of 2010. The Bloomberg ConsumerComfort Index fell to minus 46.2 in the week ended May 1, thelowest level since the end of March, as the highest gasoline pricesin almost three years soured Americans' views of the buyingclimate.

'Fed's Ventilator' “What's important for peopleto understand is the Fed is simply stepping in to create somecredit in a situation where the banking system apparently is unableto create credit,” said Paul Kasriel, chief economist at NorthernTrust Corp. in Chicago. “The patient right now is incapable ofbreathing on its own, and it needs the help of the Fed'sventilator.”

Credit provided by the Fed, commercial lenders, savings andloans, and credit unions increased 1.67 percent in the last threemonths of 2010, according to a Northern Trust report. That compareswith a long-term average of 4.58 percent since 1953. Treasuryyields may fall after QE2 ends as investors seek to protectthemselves from a worsening economy, Kasriel said.

Yields on 10-year Treasuries, which are a benchmark foreverything from home mortgages to corporate bonds, have fallen to3.16 percent from this year's high of 3.74 percent on Feb. 8,according to Bloomberg Bond Trader prices. Treasuries of allmaturities have returned 1.76 percent this year, while corporatebonds have gained 4.1 percent, including reinvested interest, Bankof America Merrill Lynch indexes show.

'Improving Gradually' In deciding to end QE2 asscheduled in June policy makers are betting that economy willrebound. The median estimate of 73 economists surveyed by Bloombergis for GDP to exceed 3 percent in the remaining three quarters ofthe year.

“The labor market is improving gradually,” Bernanke said at apress conference after the Fed's two-day meeting ended April 27.“The longer it goes on, the more confident we are.”

Bernanke said the Fed would initially hold its balance sheet,currently with $2.723 trillion in assets, steady after completingthe purchases by reinvesting the proceeds of maturing Treasuriesand mortgage bonds it during QE1.

The Fed has bought about $470 billion of government debt underthe program, said David Ader, head of government bond strategy atStamford, Connecticut-based CRT Capital Group LLC. That money hasencouraged investors to wade into riskier assets.

Record Pace Speculative-grade companies havesold $130.7 billion of junk bonds this year, compared with $106.3billion at this time last year, when sales set a record $287.6billion, according to data compiled by Bloomberg. Yields on debtrated below Baa3 by Moody's Investors Service and less than BBB- atS&P average 7.23 percent, down from 8.88 percent a year ago and14.7 percent in 2009, according to Bank of America Merrill Lynchindexes.

Banks eased lending terms in the first quarter as they forecastimprovement in the U.S. economy and companies sought more loans, aFed survey released this week of loan officers at 55 domestic banksand 22 U.S. branches and agencies of foreign banks conducted fromMarch 29 to April 12 showed.

Fifty-five percent of domestic banks surveyed reportedimprovements in the credit quality of large and middle-sized loanapplicants, the Fed said. About 35 percent reported improvements insmall firms, according to the survey.

Commercial and industrial loans totaled $1.25 trillion as ofApril 20, according to the Fed. While that's down from the peak of$1.62 trillion in October 2008, it's up from last year's low of$1.21 trillion in September, marking the longest sustained increasesince 2008.

Household credit limits rose about $30 billion in the firstthree months of this year from the previous period, the firstincrease since the third quarter of 2008, the New York Fed Banksaid May 9 in a report. Foreclosures declined 17.7 percent andbankruptcies fell 13.3 percent.

QE2 “slowed the pace of deleveraging, and it clearly helped tomitigate the risk of deflation,” said William Cunningham, co-headof global active fixed income in Boston at State Street GlobalAdvisors, which oversees $2.1 trillion. “It had a positive impacton net.”