Magazine article American Banker

Mild Inflation Report Sparks Bank Rally, but Roils Rate-Hike Waters

Magazine article American Banker

Mild Inflation Report Sparks Bank Rally, but Roils Rate-Hike Waters

Article excerpt

A mild inflation report Wednesday set off a relief rally in bank stocks, but further complicated the interest rate picture two weeks before the Federal Reserve's next policy meeting.

The consumer price index was flat in May, the government said, reversing a big energy-led price spike in April that sparked a month of investor nervousness and subtle warnings from Fed officials that higher rates could well be coming.

With investors back in action, the Standard & Poor's bank index advanced 2.7% and the Nasdaq banks 0.68%. At the same time, the blue-chip Dow Jones industrial average was up 189.96 points, or 1.8%, to 10,784.95, while the broad-market S&P 500 index climbed 29.25 points, or 2.25%, to 1,330.41.

Major banks led the way. Chase Manhattan Corp. shares surged $5.25, or 7%, to $80.375. Citigroup was up $2.065, or 4.7%, to $45.875. And J.P. Morgan & Co. was up $6, or 4.7%, to $134.

But the latest data left observers divided about the central bank's probable course at its meeting June 29-30. Today attention will be riveted on Fed Chairman Alan Greenspan's expected testimony to Congress about the economy.

"Clearly, there is now a substantial element of doubt" about the Fed, according to Ian Shepherdson of High Frequency Economics in Valhalla, N.Y. While the "obvious message" of the new data is that the 0.7% jump in April's consumer price index "was a fluke," he said, the latest Fed Beige Book data reveals upward wage pressures that may presage a rate hike.

Indeed, several economists think a Fed rate hike is likely because of the economy's ongoing strength, as shown by other indicators released Wednesday. Housing activity rebounded from a relatively weak April. Industrial production and real wages registered respectable gains.

Wednesday's rally in stocks and bonds, they said, reflected a market perception from the benign consumer price index that Fed rate increases will be limited and may already have been fully discounted by investors. …

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