Will a tougher Fed give bank shares some respect?
Bank shares have failed to close a valuation gap with fintech competitors despite the prospect of higher interest income from rate hikes. Will the Fed’s newly tough stance on inflation-busting finally give bank stocks some respect?
US Federal Reserve chair Jerome Powell sent a clear signal to markets in his Jackson Hole speech on August 26. The Fed will apply high rates to tackle inflation despite “some pain to households and businesses” in the form of slower growth.
He pointedly finished his speech by saying: “We will keep at it until we are confident the job is done."
This was an echo of the tough stance taken by Powell’s predecessor Paul Volcker, who is credited with curbing the inflationary spiral of the late 1970s and early 1980s and titled his autobiography 'Keeping At It'.
The prospect of rates that are higher for longer understandably caused a reversal of a summer rally in US stocks.
The abrupt shifts in the shapes of forward interest rate curves this year will only make queries about hedging policies more pressing
The downward movement in the two sectors was roughly proportional, however. This makes less sense given that big banks have a clear upside from a Fed hiking policy in the form of higher net interest income (NII) and a potential boost to trading revenues.