Citi Leads Banks' Snow-Day Bounce-Back

NEW YORK (TheStreet) -- Citigroup (C) and State Street (STT) were the winners among large-cap banks on Friday, with shares of both companies rising over 2%, as the sector rebounded from Thursday's losses.

As the Northeastern U.S. dug out from under a heavy snowfall, shares of Citigroup closed at $53.39, while State Street of Boston closed at $74.76.

The broad indices ended mixed, after Federal Reserve Bank of Philadelphia president Charles Plosser warned Friday that the central bank might have to be aggressive in lifting interest rates if banks were to quickly release reserves.  According to Plosser, the Federal Reserve has often been late in tightening interest rate following periods of monetary stimulus.

The Federal Open Market Committee last month announced the Federal Reserve would taper its "QE3" purchases of long-term bonds to $75 billion a month from the monthly purchases of $85 billion it had been conducting since September 2012.   The market's anticipation of the tapering pushed the yield on 10-Year U.S. Treasury bonds to 2.99% from 1.70% at the end of April.

Leading into the U.S. Senate's confirmation vote on Janet Yellen's nomination to succeed him, outgoing Federal Reserve chairman Ben Bernanke in a speech emphasized the central bank's increased "transparency and accountability," during his tenure, which the FOMC's outline of its long-term goals in January 2012.  He also said that the economic recover in the United States "has faced powerful headwinds, suggesting that economic growth might well have been considerably weaker, or even negative, without substantial monetary policy support. For the most part, research supports the conclusion that the combination of forward guidance and large-scale asset purchases has helped promote the recovery."

In addition to the bond purchases that have been meant to hold down long-term interest rates, the Fed has kept the short-term federal funds rate in a target range of zero to 0.25% since late 2008.  The FOMC has repeatedly said it would be unlikely to raise the federal funds rate until the U.S. unemployment rate drops below 6.5%.  The unemployment rate during November was 7.0%, improving from 7.0% in December.

Bernanke said that in addition to the inevitable asset sales following the Fed's massive balance sheet expansion, the central bank had other tools it could use to raise short-term rates when appropriate.  "The interest rate on [banks'] excess reserves [deposited at the Fed] can be raised, which will put upward pressure on short-term rates; in addition, the Federal Reserve will be able to employ other tools, such as fixed-rate overnight reverse repurchase agreements, term deposits, or term repurchase agreements, to drain bank reserves and tighten its control over money market rates if this proves necessary," Bernanke said.

The point of all that will be for the Federal Open Market Committee to move beyond the extended period of taking extraordinary measures to jump-start the sluggish economy in the wake of the housing crisis, and "return to conducting monetary policy primarily through adjustments in the short-term policy rate."

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