"This FOMC edition feels less dovish than it does outright scared," wrote TD Securities global head of rates and commodity research Eric Green, in a note following the statement release. "The market now has to adjust to a new probability, that tapering is delayed into the new year," he added.
Investors made quite an adjustment to that "new probability," pouring money into 10-year Treasury bonds following the FOMC statement release, sending the yield on the 10-year way down by 15 basis points to 2.70%.
For bank stock investors, the endless "taper talk" misses a very important point: What most banks need for a significant boost to their net interest margins and net interest income is a parallel rise in interest rates. The FOMC has kept the federal funds rate -- its main policy tool -- in a range of zero to 0.25% since the end of 2008. The language in the statement on Wednesday provided a bit more direction on future policy for the federal funds rate from previous statements.
The FOMC made a slightly change in its language from the previous statement, saying its "highly accommodative" policy for short-term rates would "remain appropriate" at least until the national unemployment rate drops below 6.5%, assuming inflation projections remain in check, but added that it was likely to keep the federal funds rate in its current range "for a considerable time after the asset purchase program ends and the economic recovery strengthens."Considering that the tapering hasn't even started, this is bad news for bankers hoping for a parallel rise in rates. Illustrating just how important an eventual rise in short-term rates will be for bank profits, Deutsche Bank analyst Ryan Nash on Tuesday estimated that a gradual parallel rise in interest rates of 200 basis points -- which he acknowledged "rarely (if ever) happens -- would lead to a $1.178 billion increase in Citigroup's annual net interest income. Nash went further, estimating that $1.090 of the increase in Citi's net interest income would come from a rise in short-term rates. The KBW Bank Index (I:BKX) was up just 0.2% to close at 64.72, with 14 of the 24 index components ending the trading session with declines. The subdued overall reaction among bank-stock investors may have reflected concern over the industry's profitability as short-term rates remain near zero. Big banks ending with stock gains of over 1% included Bank of America (BAC), which closed at $14.71, and Wells Fargo (WFC), which closed at $43.31.
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