The largest U.S. banks climbed the most since mid-December after minutes of the Federal Reserve's last meeting quelled Wall Street concerns that policymakers were wavering on the pace of future interest-rate increases.
The KBW Bank Index, which includes 24 financial institutions, rose 0.5 percent in New York trading on Wednesday, Jan. 3, the largest gain since the passage of the Republican-sponsored Tax Cuts and Jobs Act, which sharply reduced corporate levies. While the Fed's monetary policy committee approved a 25 basis-point rate hike in December, two members had voted against it, and some said the three increases projected for this year might be excessive, with inflation still below the central bank's 2 percent growth target. Core personal spending growth, one of the Fed's preferred inflation measures, was just 1.5 percent in November.
The seemingly dovish comments prompted concerns that the Fed might move more slowly, a drawback for lenders who typically buoy profit by passing on rate increases more quickly to borrowers than to depositors. The detailed breakdown of members' commentary from the Federal Open Market Committee meeting released on Wednesday, however, "tacks back to the hawkish side," Michael Gapen, an economist with Barclays PLC, said in a report.
Provided that more rapid labor-market growth continues to push the unemployment rate below its November level of 4.1 percent, most monetary policy committee members "will continue to expect inflation to rise to 2% over time and will likely support further increases" in the benchmark federal funds rate.
The rate was cut to nearly zero in late 2008 as the government raced to shore up the financial system after the collapse of Lehman Brothers Holdings Inc., then the fourth-largest U.S. investment bank, and remained there for more than seven years. That curbed lenders' net interest margin, the difference between what they pay to customers who deposit paychecks and what they charge clients seeking loans.
The five increases since late 2015 that have taken rates to a range of 1.25 percent to 1.5 percent have bolstered earnings for companies from JPMorgan Chase & Co., the largest U.S. bank by assets, to Goldman Sachs Group Inc. and Bank of America Corp. At JPMorgan alone, an increase of 100 basis points or 1 percent, would boost interest income by $500 million, according to the firm's most recent quarterly filing.