Bank stocks surged Thursday after Federal Reserve Board Chairman Alan Greenspan testified at a congressional hearing that inflation was "quiescent" and economic growth sustainable.
His remarks indicated the Federal Open Market Committee may not raise rates at its meeting in August, despite signs of very strong economic growth in the second quarter.
Before his comments, the consensus Wall Street view was the Fed's monetary policy arm would tighten by 25 to 50 basis points.
Mr. Greenspan's statements sent equity markets sharply higher, and the yield on the Treasury's 30-year long bond fell below 7% in midday trading.
Shares in banks, which are viewed as interest rate sensitive, rose immediately on the news. The Standard & Poor's index of major banks closed the day up 1.77%, while the overall S&P rose 1.50%. The Dow Jones industrial average rose 1.62%.
"The market was in need of some good news and we may have gotten it today," said Raphael Soifer of Brown Brothers Harriman & Co.
"Greenspan's comments that he expected the economy to slow on its own accord will benefit anything interest-rate sensitive," he said. "The bond market seems to be telling us the probability of tightening has lessened and that is favorable for interest rates, bonds, and stocks."
Large capitalization stocks, particularly money-center issues, enjoyed a hefty bounce from the chairman's remarks. These stocks tend to react more strongly to breaking news than smaller companies because program traders generally buy and sell shares in larger, more reognized companies.
The S&P money-center index rose 2.68%, while the regional-bank index rose 1.19%.
BankAmerica Corp. shares, which had risen $2 per share Wednesday, were up $2 to $78.875. Citicorp gained $3 to $81.75, and Chase Manhattan Corp. rose $1.75 to $69.50.
Many banks were recovering from large declines suffered in the past week, said Sally Pope Davis, a bank analyst with Goldman, Sachs & Co. On Monday, the Dow fell 161 points, dragging many bank stocks down with it.
"There is good market today, so you have some investors coming back and picking over stocks that had been oversold," she said. "The banks have been putting up good numbers as returns on equities and assets continue to expand."
She pointed to CoreStates Financial Corp. which prior to Thursday was off 15% from its 52-week high. Thursday the stock gained $1.50, to close at $39.
One of the few exceptions on a generally good day for bank stocks was Wells Fargo & Co., which continued to slip after reporting disappointing second quarter earnings on Tuesday.
In the first full quarter after merging with First Interstate Bancorp, Wells reported results well under expectations, and analysts continued to complain that they are confused about the bank's accounting methods.
On Thursday, the stock fell $1.25 to $220, and is now 18% off its 52- week high. The stock was the day's ninth most actively traded on any exchange, in terms of dollar amount.