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State Street Sinks Financials Lower Amid Fed Rumblings

NEW YORK ( TheStreet) -- State Street Corp. (STT - Get Report) of Boston was the loser among major U.S. banks on Tuesday as shares sank 2.7% to close at $69.90.

Banks fared worse than the broad market on Tuesday as the KBW Bank Index (I:BKX) dropped over 1% to 65.13 as Federal Reserve Bank of Dallas President Richard Fisher said in an interview on CNBC that he understood "full well" the sensitivity of investors to the eventual curtailment of the Federal Reserve's "QE3" bond purchases, but added "this program cannot go on forever."

"Every bond we buy comes back to us in terms . . . of excess reserves. Our balance sheet, of course, has become bloated," Fisher added.

Fisher went on to say that "the reports that are coming through, especially from the private sector . . . have been, on a cumulative basis, increasingly positive."

The Federal Reserve has been making net purchases of $45 billion in long-term U.S. Treasury bonds and $40 billion in agency mortgage-backed securities each month since September 2012 in an effort to hold down long-term interest rates. Stronger-than-expected numbers on Friday for U.S. job creation during October have once again raised fears among stock investors that the Federal Open Market Committee may decide to "taper" the central bank's bond buying. The FOMC next meets on Dec. 17 to 18.

Yellen's Ordeal Begins Thursday

Then again, there were plenty of negative items in the employment situation report on Friday, including a decline in the labor participation rate of 0.4% to 62.8%. "The civilian labor force was down by 720,000 in October," the Labor Department said. That underlines the case for a continued delay in tapering of bond purchases by the Fed.

Investors are also looking ahead to a Senate Banking Committee hearing Thursday, which will consider President Obama's nomination of current Federal Reserve Vice Chair Janet Yellen to succeed Ben Bernanke as the next Chairperson of the central bank.

It will be fascinating to see how Yellen navigates difficult questions from Republican members of the committee, including Senators Richard Shelby (R., Ala.) and David Vitter (R., La.). Vitter during an interview on Bloomberg TV last week said he wanted the Fed to take stronger measures to force the nation's largest banks to hold more capital. He also shared with Yellen his "concerns about this zero interest rate policy forever into the future. I am concerned that we're having little to no impact on the positive economic side, with diminishing returns on that sort of policy, but we are building up inflationary pressures, etc."
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