Bank of America Slumps on Fed Confusion: Financial Loser

NEW YORK ( TheStreet) - Bank of America ( BAC) shares were slumping after a string of speeches by key Federal Reserve officials continued to muddle investors' expectations of the Central Bank's next policy action.

Among large-cap lenders, Bank of America shares were falling the most in Friday trading, down over 1% to $12.86 in Friday trading. Regions Financial ( RF) and Zions Bancorp ( ZION) led banking industry share price declines, as the financial sector underperformed slight losses on the S&P 500 Index.

Financial sector stocks remain volatile as the Fed seeks to clarify its policy position and communication surrounding its $85 billion a month in mortgage and long-term Treasury bond purchases and the federal funds rate, which remains between 0% and 0.25%.

After Fed governor Jerome Powell said on Thursday the economy was showing signs of a strengthening recovery and New York Fed president William Dudley hinted at further monetary easing if a labor markets don't improve, a set of Friday communications continued to create a lack of consensus among officials at the central bank.

Federal Reserve governor Jeremy C. Stein said Friday the central bank's bond buying and zero interest rate policy hasn't created an unhealthy amount of risk taking in the financial system. Tradeoffs between financial stability and the Fed's work to spur asset prices still favor an accommodative stance, Stein said.

Stein also said Chairman Ben Bernanke's recent discussion of the economic data the Fed will consider as it eventually slows and ends a $85 billion a month bond buying program was a decision to give specificity to markets beyond previous guidance of "substantial progress" in the U.S. economic recovery.

Speaking at the Council of Foreign Relations, Stein noted that despite a significant rise in bond yields since Bernanke's June 19 comments, there has been no change to the Fed's bond buying. He did acknowledge there may have been a change in market expectations and a possible of re-jiggering of discount rates used by investors on Wall Street.

Bernanke is not expected to seek reelection to his chairmanship in 2014, given comments from President Barack Obama to 60 Minutes. The Fed chair's 'lame duck' status may explain the central bank's confused message in recent weeks.

The S&P 500 fell slightly to $1,606.28 in Friday trading. Some bank shares were gaining Friday including those of Hudson City Bancorp ( HCBK), US Bancorp ( USB) and M&T Bancorp ( MTB).

While Stein's comments may have been taken as a relief to investors and particularly bank investors amid a surge in interest rate yields, communications from Richmond Fed president Jeffrey Lacker fueled continued uncertainty over the central bank's easing efforts.

Lacker said during an economic outlook speech in White Sulphur Springs, West Virginia to expect volatility to stay in the markets so long as the debate on the timeline for reducing the asset purchases was ongoing. Following up on Stein's views, Lacker said he was skeptical of the notion that there could be any additional benefits from the continuation of the bond buying and was more concerned about the potential risks tied to further balance sheet expansion.

The yield on the benchmark 10-year Treasury rose to 2.49%.

Economic numbers Friday were mixed.

The headline number on the Chicago Purchasing Managers Index release on Friday pointed to a deterioration in business conditions in the Chicago area. The gauge declined to a worse than expected 51.6 in June from 58.7 in May. On average, a drop to 56 was expected, according to a Thomson Reuters poll of economists. However, the employment index component of the report showed a rise to 57.8 from 56.9.

The final estimate on the University of Michigan Consumer Sentiment Index came in better than expected at 84.1 in June vs. the prior estimate of 82.7. Economists had predicted no changes in the final estimate.

-- Written by Antoine Gara and Andrea Tse in New York.

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