NEW YORK ( TheStreet) -- Citigroup ( C) was the winner among the largest U.S. banks on Tuesday, with shares rising 1.7% to close at $51.77. The broad indices all ended with gains after Federal Reserve Bank of Atlanta President Dennis Lockhart outlined his feelings about a curtailment of Federal Reserve bond purchases. As part of the stimulus program known as "QE3," the central bank has been purchasing $85 billion per month in purchases of long-term bonds since last September. The Fed's balance sheet expansion has been meant to hold long-term interest rates down. However, investors have anticipated the curbing of bond purchases by pushing the market yield on 10-year U.S. Treasury bonds up to 2.72% Tuesday afternoon from 1.70% at the end of April. The 10-year yield on Tuesday was up a considerable nine basis points from Monday, which likely reflected the Bank of Japan's upwardly revised outlook for economic growth. Meanwhile, the Fed has held the short-term federal funds rate to a range of zero to 0.25% since late 2008 causing many banks to continue to see their net interest margins declining during the second quarter, despite a widening of the yield curve as long-term rates increased. The Federal Open Market Committee has repeatedly said the federal funds rate will likely stay in the current range at least until the U.S. unemployment rate drops below 6.5%. The July unemployment rate was 7.4%, improving from 7.6% in June. Lockhart in a speech before the Kiwanis Club of Atlanta on Tuesday emphasized that the federal funds rate is the FOMC's main policy tool, and said the QE3 asset purchasing program "plays a complementary and supplementary role. It clearly was intended to have a beginning and end. It is not QE infinity." Lockhart also said decisions on reducing the Fed's balance sheet expansion "will be data dependent. Economic performance will dictate the path of policy." But Lockhart made two comments that likely provided some reassurance to investors looking to avoid being spooked by a sharp jump in interest rates. He said "healthy employment growth coupled with tepid GDP growth implies weak labor productivity growth. And in fact, productivity growth in recent quarters has been significantly below historical norms."
He also emphasized that "keeping short-term interest rates near zero for a considerable time after asset purchases end will help maintain a high degree of monetary policy accommodation." That comment helped sooth any investor fears of a near-term rise in the federal funds rate. While having the federal funds rate near zero has factored heavily in the broad stock market rally this year and last year, banks are looking for a "parallel" rise in interest rates, will only come about when the federal funds rate starts to rise. According to BMO Capital Markets analyst Lana Chan, that should already be baked into bank stock price targets. Chan raised price targets for a slew of regional banks. She expects the federal funds rate to begin to rise in the middle of 2015, moving up to 1% at the end of that year, and rising to 2.0% by the middle of 2016. In economic news, the Census Bureau said its advance estimate for retail sales in the U.S. for July was a seasonally adjusted $424.5 billion, increasing 0.2% from June, and 5.4% from July 2012. The July sequential retail sales growth number came in below the consensus estimate of 0.3% among economists polled by Thomson Reuters. On a brighter note, July was the fourth consecutive month for retail sales increases, and excluding auto sales, retail sales were up 0.5% from June. The total retail sales growth number for June was upwardly revised to show a gain of 0.6% from May. Sterne Agee economist Lindsey Piegza in a note to clients on Tuesday provided a "bottom line" to the retail sales report: "While positive, this morning's retail sales report was far from robust, and not yet enough to eradicate fears of a consumer slowdown undermining growth in the second half of the year." According to Piegza, "the effects of tax increases often take time to filter into consumers' long-run spending patterns, and with government furloughs taking effect coupled with modest employment gains and minimal income growth, there is plenty of cause for caution." The KBW Bank Index ( I:BKX) rose 0.3% to close at 65.36, with all but nine of the index components showing gains. Large banks seeing shares rise over 1% included Morgan Stanley, which closed at $26.96, and Goldman Sachs, closing at $163.71.
Email. Follow @PhilipvanDoorn
Email. Follow @PhilipvanDoorn