What’s in the Cards for Banking Sector in FOMC Meeting? – March 17, 2021
The Federal Reserve is set to wrap up its two-day policy-setting meeting later today. Though it is unlikely that the central bank will make any changes in the interest rates this time, investors will be carefully watching the economic projections, adjustment to the bond buying program and indications as to when rates are likely to be raised.
In the December FOMC meeting, the Fed officials had projected that rates will be held down at near-zero at least till 2023-end. But this is likely to change now.
There are high chances that the Fed officials may signal possibility of raising interest rates in late 2022 or early 2023.
What happened during the past three months that may have changed the Fed’s view? Well, since then, nearly $3 trillion worth of stimulus package has been passed by the Congress, which along with favorable data has increased optimism about a faster economic recovery. Also, the coronavirus infection rate is falling and vaccination coverage is increasing with the President Joe Biden planning to secure sufficient doses by May-end (two months earlier than expected).
All these developments indicate that the economy will likely to be out of the woods at faster-than-expected pace. Per the Fed’s last Summary of Economic Projections, the U.S. economy will grow at rate of 4.2% this year, with unemployment rate of 5% and core inflation of around 1.8%. Now, these numbers are highly likely to be revised upward.
Notably, before raising interest rates, the central bank will have to first wind down its asset purchase program. But it has not indicated any such plan in the near term. At present, it buys roughly $120 billion per month in bonds in order to keep markets flowing and financial conditions loose.
Nonetheless, markets have already begun pricing the expectations of early rate hike. The yield on the 10-year U.S. Treasury has surged almost 70 basis points since the last FOMC meeting.
Thus, the Fed is expected to be a little less accommodative this time.
Where Do Banks Stand Amid All This?
We know that banks thrive in the rising rate environment. So, when the Fed cut short-term interest rates to near-zero last year amid the pandemic, banks faced a tough operating environment. This, along with economic slowdown and faltering loan demand substantially, hurt banks’ financials.
In 2020, SPDR S&P Regional Banking ETF and KBW Nasdaq Bank Index were down 8% and 14.6%, respectively. Likewise, the Zacks Major Regional Banks industry and Zacks Banks & Thrifts industry lost 17.2% and 10.5%, respectively. Nevertheless, the S&P 500 Index rallied 18.6% over the same time frame.
Price Performance in 2020.jpg)
Nonetheless, the trend is reversing of late. Optimism surrounding the banks is primarily driven by the expectation of an accelerated recovery of the sector along with above-mentioned favorable developments.
Banks seek to borrow money at short-term rates and lend at long-term rates. Now that long-term rates are rising, the yield curve is steepening. Thus, almost all banks – big and small – that faced net interest margin compression last year, are expected to witness some improvement in the same.
Also, as interest income constitutes a major portion of banks’ revenues, steepening of the yield curve, along with rise in demand for loans, will support net interest income. So, banks including JPMorgan (JPM – Free Report) , Bank of America (BAC – Free Report) , Huntington Bancshares (HBAN – Free Report) , Umpqua Holdings Corporation (UMPQ – Free Report) and Zions Bancorporation (ZION – Free Report) are likely to record robust top-line growth.
Another main driving factor for banks’ financials is the overall health of the nation. On the assumption that the central bank will revise its economic growth forecast upward, this will provide further support to the banks.
+1,500% Growth: One of 2021’s Most Exciting…
Read More: What’s in the Cards for Banking Sector in FOMC Meeting? – March 17, 2021