The Federal Reserve's cloudy but still generally positive view of the economy and policymakers' expectations for interest rate cuts later this year galvanized investors and bolstered bank stocks this week.
The KBW Bank Index gained 1.5% on Wednesday after the Fed said it would hold the line on its benchmark rate at 4.25% to 4.5%, where it has been since December. The index rose another 1% Thursday morning before tapering off in early afternoon trading.
"I do think there is more positivity out there than maybe we've been led to believe by the headlines," Robert Bolton, president of bank investor Iron Bay Capital, said. "And I think the bank stocks overcorrected" in the past month. "There could still be some bump and chop, but I think we're heading in the right direction."
The KBW index was still off nearly 10% from February highs, prior to the trade wars with Canada and other long-standing allies, because of tariff uncertainty and concerns about
The Fed increased its projection for core inflation this year — to 2.8% from 2.5% — which would put the annual rate of consumer price increases, excluding food and energy, below the government's
Citing unknowns linked to the extent and duration of tariffs, Fed officials said they now see the economy growing at just a 1.7% pace this year, down from 2.1% in their last projection in December. President Trump has started, paused and then modified various tariffs over the past few weeks and threatened a barrage of additional levies in April.
In its post-meeting statement, the central bank's federal open markets committee said there's an elevated level of ambiguity. Trump's tariffs could raise consumer prices, reignite inflation and have a chilling effect on economic growth, the FOMC conceded.
"Uncertainty around the economic outlook has increased," the committee said.
However, the FOMC still sees
"The economy is strong overall,"
Bankers' surveys of commercial clients have found that corporate decision-makers are less concerned about adverse tariff effects than nervous investors.
The Fed could keep rates high to tamp down spending and ward off another surge in inflation like the one that emerged in 2022 following the pandemic and Russia's invasion of Ukraine. Inflation peaked at 9.1% that year.
Or the central bank could further lower rates to encourage borrowing, spending and greater overall activity after determining inflation is under control. With policymakers leaning toward the latter, bank investors were betting on continued economic growth as well as lower rates that could drive loan demand, decrease deposit costs and support credit quality, Bolton said.
Should the White House's tariff policies find an equilibrium and policy uncertainty ease, Bolton and other observers also anticipate a new
"While M&A activity has been muted in recent months, private equity firms and investment bankers are beginning to talk of upcoming deal activity," said Scott Merkle, managing partner at SLB Capital Advisors. The Fed's outlook "should be dovish enough to keep those processes in play and hopefully conducive enough to support a rebound to the slow M&A start for the year. … The possibility of lower rates ahead may provide another push for M&A activity down the road."
However, Powell said the Fed would take a wait-and-see approach on inflation and rates. He emphasized that Trump's policies have led to unpredictability. Fed policymakers next meet in May.
"The new administration is in the process of implementing significant policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy," Powell said. "While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their effects on the economic outlook is high."
Analysts said the guarded view of the operating environment leaves plenty of risk permeating banks' shares.
"A number of banks are seeing commercial-and-industrial loan growth due to inventory building to get ahead of tariffs, but plenty of borrowers are on the sidelines owing to this uncertainty over the tariffs and reluctant to make investments," analysts at D.A, Davidson said in a report. While forecasting a rebound in both economic activity and loan demand in the second half of 2025, "there is a risk that it does not materialize the longer this uncertainty persists," they wrote.
Keefe, Bruyette & Woods analysts said in a note that they too are cautiously optimistic but added that banks should still prepare for "adverse scenarios." This could result in higher levels of reserves for potential loan losses, they said. Higher credit costs could eat into banks' bottom lines.
