As the U.S. economic recovery proceeds, investors have obviously been showing increasing willingness to take on risk, sending the Dow Jones Industrial Average and S&P 500 both up 16% this year, the KBW Bank Index has risen 17%. A major factor in the recovery has been massive stimulus from the Federal Reserve, which has kept its short-term federal funds rate in a target range of zero to 0.25% since the end of 2008. Since September, the Fed has keep up its monthly purchases of $85 billion in long-term securities, in an effort to hold long-term rates down. Of course, the Fed cannot continue increasing the U.S. money supply at this rate forever, and the Federal Open Market Committee (FOMC) said after its last meeting on May 1 that it was "prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes." That was a change in the FOMC's language from previous statements, when the committee merely said it would "take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives."
Speaking Tuesday at a conference in Stockholm, Federal Reserve Bank of Philadelphia president Charles Plosser said that the " changes in the size and composition of the
Guggenheim analyst Marty Mosby says that one of the reasons investors are warming to bank stocks is that the major players showed such strong efficiency improvements during the first quarter. "We thought large banks' earnings would grow by 15% this year, while the market expectation was 5%," Mosby says, adding that "expense savings represented 80% of the variance" of his forecasts to the consensus. "During the first quarter, we got two thirds of the efficiency improvement we expected for the entire year," Mosby says. When discussing how the Federal Reserve will curtail its long-term economic stimulus, Mosby says "they won't raise the federal funds rate until well after they have stopped expanding the balance sheet." The analyst expects the Fed to end its net long-term securities purchases by the middle of 2014. "Once that is in place and they are comfortable the economy can absorb that shock, then they will judiciously raise short-term interest rates." -- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn