Bank stocks soared Monday as investors got news that inflation remains low and concluded that the Federal Reserve, meeting today, will probably limit any increases in interest rates.

Banks led an overall market rally, with the Standard & Poor's bank index rising 1.78% versus gains of 1.22% in the broad-market S&P 500 and 0.97% in the blue-chip Dow Jones industrial average.

"It's a response to some of the 'irrational caution' we saw last week, particularly in the bond market," said analyst Raphael Soifer of Brown Brothers, Harriman & Co.

Bond prices rose and yields fell sharply on Monday, reversing some of last week's run-up in rates that depressed bank stocks. Bank investors frequently take their cues from the fixed-income sector.

The market was heartened by a report that the consumption price deflator - a key inflation measure - was unchanged in May after rising 0.6% in April, and is ahead just 1.3% from a year earlier.

Fresh data on personal income and consumption hinted that consumer spending, which has been driving the economy, may be moderating, though it remains strong. That may relieve the Fed's policymakers.

"We believe real consumer spending increased at around a 4% rate in the second quarter and that GDP will grow at around a 3% pace," said Gerald D. Cohen, senior economist at Merrill Lynch & Co. "This is sharply lower than last quarter's 6.7% gain in consumption and 4.3% GDP growth."

Fed chairman Alan Greenspan suggested earlier this month in congressional testimony that 3% annual economic growth is now seen by the central bank as sustainable without an outbreak of inflation.

With rate worries diminished, analysts said investors may also now be refocusing on second-quarter bank earnings, which are expected to be good.

"Besides the strong bond market, I think investors are coming around to the recognition that the industry's second-quarter numbers, with the exception of First Union, are going to be very good looking," said Gerard S. Cassidy of Tucker Anthony, Boston.

"Third, with a Fed rate increase, the banking industry should actually be more profitable in the second half as spreads widen," he said.

Mr. Cassidy acknowledged that the movement of bank stock prices in a rising rate climate is "a day-to-day thing," with activity sometimes dominated by investor fears.

"But over the next six months, as psychology shifts from upward moves in interest rates to benign, even downward moves, bank stocks are going to be the leaders," he said.

Net interest rate margins are already improving, said another analyst, Claire M. Percarpio of Janney Montgomery Scott, Philadelphia. She said a small increase in rates would actually help earnings, but she added that "investor psychology has to adjust" in a rising rate period.

Large banks fared especially well Monday, perhaps buoyed by good results reported recently by investment banking companies whose fiscal quarters ended May 31, like Lehman Brothers.

Shares of Citigroup Inc. were up 4.99%, to $46, while J.P. Morgan & Co. rose 4.28%, to $134.0625, and Chase Manhattan Corp. 1.77% to $82.625.

Bank One Corp. of Chicago, advanced 2.15%, to $56.4375; National City Corp. in Cleveland 3.07%. to $65.125; and SunTrust Banks Inc. of Atlanta 1.40%, to $67.875.

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