Stocks: Bank Stocks Seesaw After Fed Decides Not to Move

The Federal Reserve opted Tuesday not to raise interest rates, apparently deciding that the nation's economy is healthy enough to grow at its current pace without a return of inflation.

Stocks and bonds rallied on the news, then fell back as nervous investors tried to evaluate the central bank's move.

Bank stocks endured a volatile session marked by a series of analysts' downgrades, although one analyst predicted that the Fed's decision would bolster bank stocks for the time being.

"Psychologically, the market views the Fed's decision as a positive for the banks," said Lawrence W. Cohn of PaineWebber Inc. "So the stocks should benefit until we find something else to worry about."

The monetary policy meeting in Washington - the last before the November presidential election - was marked by unusual drama. Rumors had swirled that the Fed was divided about the need to take steps against incipient inflation.

In its customary low-key fashion, the Fed had no comment after the meeting, because no action was taken. The federal funds target rate stays at 5.25%, where it has been since January, and the bank prime rate will likely stay at 8.25%.

The reaction among bank stock investors was ambiguous. Citicorp gained 37.5 cents to $89.75 while shares of BankAmerica Corp. fell $1.625 to $80.50.

Among interest-sensitive mortgage companies, Federal National Mortgage Association shares gained 50 cents to close at $34.50, shares of Countrywide Credit industries slipped 25 cents to $24.50

Elsewhere, First Tennessee National Corp. stock dropped 31.25 cents to $33.188 per share after it was downgraded to "hold" by Prudential Securities.

Analyst Ruchi Madan said uncertainty among investors about the bank's bond portfolio, which accounts for about 10% of its earnings, could hold down the stock price.

Salomon Brothers analyst Sharon Ptashek, who lowered her rating on First Tennessee to "hold" last week, said the bank's stock comes under particular scrutiny when there's talk of raising interest rates. "The downgrade reflects aligning expectations with the reality of the bond market," she said.

Shares in First Bank System Inc. fell as much as $1.50 on a downgrade by Piper, Jaffray before recovering to $66.75 down 50 cents.

Analyst Steven Schroll downgraded the stock to "buy," saying it is the first time since he started following the stock seven years ago that he does not consider the bank to be a "strong buy." He cited price.

"There is nothing wrong with the company; it's a great company," he said. "But even great companies get to the point where they are fairly valued."

James Schutz, analyst at the Chicago Corp., downgraded First Bank shares last week to "hold" from "buy" also based on price.

Keystone Financial Inc. shares fell 25 cents to $24.75 after Mr. Schutz downgraded the Harrisburg, Pa. bank's stock to "hold" from "buy." He said he lowered his earnings-per-share estimates to $1.83 from $1.90 for this year and to $1.97 from $2.07 for 1997.

"They have a lot of competitors in their home market," Mr. Schutz said. "That area hasn't seen the consolidation that others have."

Commerce Bancshares Inc. stock rose $1 to $39.875 after the Kansas City- based bank was upgraded by Michael Ancell, analyst at Edward Jones & Co. Noting "some very serious cost-realignment," Mr. Ancell said he expects Commerce to post third quarter earnings of 82 cents per share, three cents higher than the consensus estimate.

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