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People's United: Financial Winner

NEW YORK ( TheStreet) -- Bank stocks rose on Tuesday as the Federal Reserve met to discuss whether the economy had sufficiently improved to justify a gradual tapering of the central bank's massive monetary stimulus program.

The Federal Reserve will conclude its two-day meeting on Wednesday and Chairman Ben Bernanke will hold his quarterly press conference. The central bank is expected to say that it will gradually taper its bond purchases but will not hike short-term interest rates anytime soon.

Major stock averages rose Tuesday amid signs that inflation hasn't spiked as a result of the bank's stimulus measures, and data showing that the country's housing market remains months, if not years, away from a full recovery. That means the central bank will not take its foot completely off the pedal.

The KBW Bank Index, an index of 24 banks, rose 0.8%. People's United Financial (PBCT - Get Report) led the index higher, rising 2.7% after being upgraded to overweight by JPMorgan Chase analyst Steven Alexopoulos. The analyst said the current price offered the best entry point in two years and sees 15% upside to the 2014 consensus earnings forecast.

M&T Bank (MTB - Get Report) shares rose 1.1% after it reached an agreement with the Federal Reserve over a money laundering probe that had held up its merger with Hudson City Bancorp (HCBK - Get Report).

The bank will hire an independent consultant to review transactions of "high-risk customer accounts" in the last six months of 2012. It will also have to submit an anti-money laundering compliance program to the Fed outlining specific actions the bank is taking.

Shares of Hudson City rose 2.4% on the news.

Citigroup (C - Get Report) rose the most among the big four money-center banks, gaining 1.3%.

The bank, along with JPMorgan Chase (JPM), PNC Financial (PNC) and Huntington Bancshares (HBAN) would prove to be safer bets amid uncertainty about when the Fed will end its monetary stimulus, according to Bank of America Merrill Lynch analysts.

Bank stocks have been under pressure lately on fears that a sudden and unexpected rise in interest rates from an unwinding of the Fed's monetary stimulus would hurt profits.

The S&P bank index has rallied an average of 36%, compared with 27% for the S&P 500 following previous announcements of quantitative easing (QE), according to BofA Merrill Lynch. But when the Fed ended QE1 and QE2, bank stocks fell an average of 19%, compared with a 9% drop for the broader market, Bank of America's analysts concluded.

The analysts noted that Citigroup "tends to be more volatile than the market," but, citing "the strong underpinnings of the US housing recovery," they argue "the long-term recovery thesis at Citi is still intact," and recommend "buying particularly on any weakness."

-- Written by Shanthi Bharatwaj New York.

>Contact by Email.

-- Written by Shanthi Bharatwaj New York.

>Contact by Email.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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