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Bank Stocks Are Strong on Manufacturing Boost

For more on what led to the current impasse over Fannie Mae and Freddie Mac and the interests of the various players, please see Were Fannie, Freddie Negotiations Done in Good Faith?, Ralph Nader Discusses Fannie and Freddie Shareholder Fight and Fannie and Freddie Plaintiffs Eye FDIC Share Sales.

Fannie Mae's common shares were down 9.2% to $3.75, while Freddie's common shares were down 9.7% to $3.71 in the last few minutes of trading.  Junior preferred shares of the GSEs were also weak, with Fannie's preferred series S shares (FNMAS) down 1.4% to $60, while Freddie's preferred Series Z shares (FMCKJ) were down 0.6% to $11.13.  Both junior preferred issues have face values of $25, with investors hoping they may trade up to par if their dividends eventually are restored.

Federal Reserve

The Federal Open Market Committee on Tuesday will begin a two-day meeting, to be followed with the release of a policy statement Wednesday afternoon. The committee is expected to continue to wind down the central bank's monthly "QE3" purchases of long-term bonds, which ran at a pace of $85 billion a month from September 2012 through December of last year, with the pace declining to $75 billion in January and $65 billion in February.

Federal Reserve Chairwoman Janet Yellen has said the FOMC expects to wind-down the bond purchases by the end of 2014.

The Fed's massive balance-sheet expansion through QE3 has been meant to hold long-term interest rates down, and the FOMC is looking to return to focusing on its main policy tool -- the short-term federal funds rate -- once the bond purchasing ends.

The federal funds rate has been locked in a target range of zero to 0.25% since late 2008. For some time, the FOMC had set a benchmark of 6.5% for the U.S. unemployment rate, before the committee would consider raising the federal funds rate. Yellen has also indicated the federal funds rate won't move higher until after QE3 ends.

But investors might see new language in Wednesday's FOMC statement hinting at when short-term interest rates may be allowed to rise, because the unemployment rate improved to 6.6% in February from 6.7% in January. A rising federal funds rate will be music to the ears of bankers, since most banks have been continuing to see pressure on their net interest margins, despite a rise in long-term interest rates over the past year. This is because many classes of assets continue to reprice at lower interest rates, since they are pegged to short-term rate benchmarks.

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