Bank Stocks Loved Janet Yellen’s Congressional Testimony

Fed chair, Janet Yellen testified before Congress on Valentine’s Day, Tuesday, 14 February 2017.

The Congressional hearing provided cannon fodder to traders looking to go long on bank stocks.

Yellen expressed optimism about the state of the US economy, given falling unemployment numbers, rising inflation, and robust economic growth.

She was a little circumspect when it came to President Donald Trump’s economic agenda vis-à-vis fiscal policy.

Recall that Trump ran on an election mandate of massive tax cuts for the corporate sector (15% to 20%), deregulation of the financial sector with the repeal of Dodd-Frank, and the repeal/replace of Obamacare.

Bank of America

All of these aspects of the economy were front and center in his populist campaign, and he was elected to the highest office by voters in middle America and beyond. However, Janet Yellen is not convinced that Dodd-Frank is inherently bad for the banking sector in the US. She cited statistics that make a compelling case for the competitiveness of US banks on the international stage.

Yellen confirmed that several interest rate hikes would be taking place in 2017, and sooner rather than later. In her own words, Yellen had this to say about interest rates: “… As I noted on previous occasions, waiting too long to remove accommodation would be unwise.”

The Federal Funds Rate (FFR) and How It Affects Bank Stocks

The current federal funds rate is 0.50% – 0.75%. The last time the Fed raised interest rates was on December 14 2016. That was only the second time in a decade that the Fed raised interest rates. For 2017, at least 3 rate hikes are expected. The Federal open market committee (FOMC) could be increasing interest rates as early as March 15, 2017. The current probability of a 25-basis point rate hike (raising the FFR to 0.75% – 1.00%) is now 26.6%. For May 3, 2017, the probability of a 25-basis point rate hike is 40.6%, and the likelihood of an even greater rate hike in the region of 1.00% – 1.25% is now 8.0%. Bank stocks did not lose a beat, and reacted strongly to Janet Yellen’s commentary.

On Valentine’s Day, bank stocks reacted sharply to Yellen’s calls for modest and gradual increases in interest rates. As interest rates rise, so banks can charge more in interest on loans. Yellen is opposed to a sharp increase in interest rates, as this will have a disruptive effect on the economy. Now, investors and traders see the benefit of consistently appreciating bank stocks, and this is being priced into the markets. No other industry benefits more from rate hikes in the banking industry. Major banks like Bank of America Corporation (BAC) Goldman Sachs (GS), JPMorgan (JPM), Citigroup ( C ), Wells Fargo & Co (WFC) and others were bullish on Tuesday, 14 February 2017, and they maintained that momentum on Wednesday.

Wall Street Reacts Favourably to Rate Hikes and Here’s Why

According to the data available at  Saxon Trade, Wall Street indices reacted with enthusiasm to Janet Yellen’s approach to interest rate hikes. Recall that Wall Street bourses like the NYSE, Dow Jones, NASDAQ, S&P 500 index and Russell 2000 do not appreciate sharp and sudden interest rate hikes. They will react favorably to gradual and consistent rate hikes as this can be priced into the stocks without too much of a disruptive effect.

Typically, rate hikes are not good news for stock markets as it means the companies listed on these exchanges will be paying more for their loans and generating less profits. The gradual approach is the lesser of two evils and that’s precisely why we see the major indices on the up and up.

If there’s one thing that markets despise its uncertainty.

Now that Yellen and the FOMC have laid out their plans for the US economy, investors and traders can price such decision-making processes into their daily trading activity.