Magazine article American Banker

Banks Rally as Fed's Modest Rate Hikes Clarify Prospects

Magazine article American Banker

Banks Rally as Fed's Modest Rate Hikes Clarify Prospects

Article excerpt

Bank stocks rallied strongly Tuesday despite a 25-basis-point hike in two key interest rates by the Federal Open Market Committee.

Tuesday's rally -- though not as powerful as last week's moves -- indicated that bank stocks have hit a bottom and that investors are confident Federal Reserve Chairman Alan Greenspan can create a soft landing for a fast-growing economy, market observers said.

"Investors were relieved that the Federal Reserve raised interest rates by only 25 basis points," said Sung Won Sohn, chief economist at Wells Fargo & Co. "The primary concern before the hike was that the Fed would become more aggressive in raising rates. This recent action indicates that it plans to continue with its slow monetary policy.

"In the short run the uncertainties of interest rates are diminished, and the immediate pain is not that great" for bank stock investors, Mr. Sohn said.

The central bank raised its fed funds target rate, which banks charge each other for overnight borrowings, to 6%, its highest in almost five years. The Fed also raised its discount rate, which it charges banks for overnight advances, by 25 basis points, to 5.5%. Bank investors worry about interest rate hikes because they squeeze the profit margins on loans. Tuesday's increase was the fifth in the fed funds rate and the fourth in the discount rate since June, when the Fed became concerned about an overheating economy.

This concern persists. "Increases in demand will continue to exceed the growth in potential supply, which could foster inflationary imbalances that would undermine the economy's record economic expansion," the policymaking committee said in a press release. …

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