Federal Reserve policymakers Wednesday triggered a big bank stock rally, announcing they had dropped their bias toward tighter money even as they raised a key rate.
The Federal Open Market Committee raised the federal funds rate 25 basis points, to 5%, and left the discount rate at 4.50%, in moves that relieved investors who had worried that a series of rate hikes were coming.
"The Fed is saying it feels comfortable with the rate of the economy's growth," said Joseph Roberto, an analyst at Keefe, Bruyette & Woods Inc. The announcement sent the market "off to the races again," he said.
The American Banker index of the 225 largest banks' stocks jumped 2.87% in 20 minutes, to 880.9 by 2:30 p.m., just after the Fed's announcement.
By the end of trading, Chase Manhattan Corp. was up 4.69%, to $83.50; Citigroup Inc. 3.12%, to $47.50; J.P. Morgan & Co. 3.50%, to $140.50; State Street Corp. 2.78%, to $83.375; and Zions Bancorp. 1.80%, to $63.50.
The Standard & Poor's bank index added 1.32%, to 706.71; and the Dow Jones industrial average 1.44%, to 10,970.80. The Nasdaq bank index was up 0.36%, to 1,867.3; and the S&P 500 1.57%, to 1,372.66.
"It's a relief rally," for bank stocks, said Mark Davis, director of research at the Bank Stock Group, Columbus, Ohio, arguing that bank prices had reflected the 25-basis-point hike.
The Fed committee was widely expected to increase rates by 25 basis points and another 25 at either its August or November meeting.
Analysts said Fed Chairman Alan Greenspan had encouraged such expectations by telling Congress last month he favored "modest preemptive actions" to "obviate the need of more drastic actions at a later date that could destabilize the economy."
But in suggesting Wednesday that a single rate increase should be enough, some economists said, the Fed wasn't following that prescription. "This sort of defeats the purpose of the tightening because stocks and bonds will shoot higher and that will just provide more fuel for a runaway economy," said David Jones, chief economist at Aubrey Lanston & Co. in New York.
"The real drama was what words would the Fed adopt," said Scott Edgar, director of research at the Sife Trust Fund in Walnut Creek, Calif. "Along the way a rate hike could occur, but this lessens the probability."
"A lack of bias is a very big positive," said Jeffrey Warantz, equity strategist at Salomon Smith Barney. "It's a great sign for the market and banks."
Carla D'Arista, a banking analyst at Friedman Billings Ramsey & Co. said bank stocks will continue their upswing from here.
"The group will continue performing strongly into the summer as second- quarter results come and people see how good they are," she said.
But some market observers cautioned against too much euphoria. Analysts said bad news on consumer or producer prices or employment could still derail bank stocks.
"It will be an O.K. summer for bank stocks," said Nancy Bush, a bank analyst at Ryan, Beck & Co. "The danger here is despite the Fed taking 25 basis points away from the punch bowl, people and markets tend to worry. They think about higher interest rates and inflation," Ms. Bush said.
But on Wednesday the news from the Fed was enough to offset most worries.
Bank stocks had started the day mixed and by afternoon were almost uniformly down, some by a point or more. That quickly changed after the 2:15 announcement.
The Fed had cut rates by 75 basis points last fall to curb global market turmoil as Asian nations' financial woes spread to Russia and South America.
With its move Thursday, "the Fed is acting to move rates up from an artificially low level," said Mr. Warantz of Salomon.