Bank stocks rallied Monday as investors apparently shrugged off the increase in interest rates anticipated today from the Federal Open Market Committee.

Citigroup Inc., J.P. Morgan & Co., and First Tennessee National Corp. were standouts in a bank sector that performed strongly with the overall market. Citigroup was up $2.25 a share, to $48.5625; First Tennessee $1.375, to $34.375; and Morgan $6.625, to $139.5625.

The Standard & Poor's bank index gained 2.27%, and the Nasdaq bank index 0.95%, as the Dow Jones industrial average rose 1.79% and the S&P 500 1.77%.

"This could be the time for bank stocks to bounce back for a sustained rally," said Steven Berman, a financial services analyst at Stein Roe & Farnham. "Today the market is saying we'll get one, maybe two, rate hikes by yearend and that the Fed will successfully slow the economy."

Analysts said investors felt comfortable putting money into bank stocks because Federal Reserve policymakers are expected to raise rates one-quarter of a point and adopt a benign bias toward future hikes.

"It's becoming a foregone conclusion how the Fed will act," said David Trone, a banking analyst at Credit Suisse First Boston.

Mr. Trone said he did not expect policymakers to adopt a bias towards raising rates.

Inflation is under control, he said, pointing to price data from consumers and producers released last week.

"We've seen good numbers coming into this meeting," said Mark Davis, research director at the Banc Stock Group of Columbus, Ohio.

"The question then comes to what's beyond tomorrow," Mr. Trone said. "It looks as though no more hikes will be necessary in 1999.

"A big issue will be what the Fed telegraphs and if they telegraph," he said.

At its last meeting, June 30, the FOMC raised the federal funds rate by 25 basis points, to 5%. Policymakers said at the time that they had abandoned their bias toward tighter money.

On Monday, larger banking companies were seeing the most interest.

"When people come back to the sector they tend to come back to the big names first," said Lori Appelbaum, a banking analyst at Goldman, Sachs & Co.

"We're seeing a flight to liquidity and a flight to quality," said Diana Yates, a banking analyst at A.G. Edwards & Co.

Investors who choose big stocks benefit from "greater liquidity,'' Ms. Yates said. "If you need to get out, you can do so quickly."

Though less liquid, BB&T Corp. was also up ahead of the pack. Its stock rose $1.5625, to $36.375.

Still, many of the big banking companies are far off their 52-week highs.

Bank One Corp. rose 68.75 cents, to $56.0625, still shy of its high of $63.5625; Chase Manhattan Corp. was up $1.9375, to $85.6875, off from its high of $91.125, and Wells Fargo & Co. was up 81.25 cents, to $43.0625, below its high of $45.1875.

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