Federal Reserve's

sneak attack

rate-cut Wednesday bounced the bank index to a record high, but the bang in financial stocks may prove premature.

Investing Strategies

Big News From the Fed! What's It Mean for the Long-Term Investor?

The Smart Money Is Split on What the Fed Move Means

Sector Plays

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Biotechs Cheer, Drugs Jeer Rate Cut


The Morning After: Hangover or New High?

Cramer Special: The Fed's on Your Side Now

The Mother of All January Effects Won't Give Birth to a Baby Bull

The Fed's Big Mistake ... Too Much Too Soon

Market Reaction

Who Made Who? Fed Actions Put the Market Front and Center

Wednesday's Market: Nasdaq Posts Best Gain Ever After Fed's Surprise Move

Fed Move Slices into Options Prices, At Least for Today

Long End of Treasury Market Battered Following Rate Cut

Pulse: Giddy Tech Investors Give Life to Beaten Up Chip Stocks


Why Did the Fed Cut Rates Today?

How Is This Intermeeting Rate Cut Different From October '98

The Fed's Move May Be a Preemptive Strike on Friday's Jobs Reports

A rate cut would seem like just desserts for the financial sector, where profits have been squeezed by a series of six rate hikes that started in mid-1999 as the Fed tried to rein in the red-hot economy. But bank stocks have a handful of other issues weighing on them right now -- most noticeably the specter of bad loans -- so the sector has plenty of vegetables to swallow before it can get to the good stuff.

"I don't think this changes things dramatically. Things aren't going to get better overnight

for companies with fundamental business problems," said Kevin Timmons, banks analyst at

FAC Equities

in Albany, N.Y. He points to credit problems at companies like


(XRX) - Get Xerox Holdings Corporation (XRX) Report

, which in turn can hurt banks they borrowed from.

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And for months bank analysts have fretted that the economic conditions that could yield a rate cut might also carry the threat of recession as the economy continues to slow. "What is the Fed saying is so scary with a cut at this time, of this magnitude?," says Nancy Bush, banks analyst at

Prudential Securities

. "I'm not sure

the Fed can generate demand" with this cut.

Of course, financials will undoubtedly get a boost from the cuts as they take some pressure off the cost of doing business. Not only is it cheaper to borrow money, but also as Bush points out, "it reduces the cost of carrying nonperformers." (Nonperforming assets are loans that are past due but haven't been written off yet.) Timmons adds, "in terms of perceptions, this is unbelievably good."

Banks that engage in consumer lending including

thrifts could stand to gain the most particularly since their balance sheets are more sensitive to interest-rate moves than commercial banks' assets. Consumer-based bank stocks bore the brunt of the pain when rates were on their way up, so analysts expect them to gain on the downside, though some of the rate cuts have already been pricing in over recent months.

"My reaction is pretty much mixed," says Bush. "It lightens the mood, but it's not going to keep

certain types of credits from going nonperforming -- those whose crises were not precipitated by rate events."


American Stock Exchange Broker/Dealer Index

climbed 12.4% to 605.51, while the

Philadelphia Stock Exchange/KBW Bank Index

rose 5.1%, to 933.75 after hitting an intra-day 52-week high of 935.6.