Bank stocks drop after Fed holds interest rates, predicts cuts later in 2024

US bank stocks fell moderately on Jan. 31 after the Federal Reserve said it would keep the federal funds rate within the range of 5.25% to 5.5%.

The KBW Nasdaq Bank Index closed down 2.33% on Jan. 31, while the S&P 500 closed down 1.61%.

Among individual bank stocks, the biggest movers included Western Alliance Bancorp., which closed down 6.42%; Webster Financial Corp., down 5.52%; and Comerica Inc., down 5.41%.

New York Community Bancorp Inc. shares closed down 37.67% in a move driven by a fourth-quarter net loss and a dividend cut.

The Federal Open Market Committee (FOMC) has raised benchmark interest rates by 525 basis points since March 2022, though it has now left rates flat for four consecutive meetings. The committee last raised rates in July 2023.

"We believe that our policy rate is likely at its peak for this tightening cycle, and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year," Chair Jerome Powell told reporters after the FOMC announcement. "But the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2% inflation objective is not assured. ... The committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%."

Powell gave an indication that the FOMC probably will not cut rates in March.

"We're going to be data-dependent — we're going to be looking at this meeting by meeting," Powell said. "Based on the meeting today, I would tell you that I don't think it's likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that, but that's to be seen. ... That's probably not the most likely case or what we would call the base case."

How soon the Fed decides to cut rates ultimately hinges on how satisfied central bank officials are with inflation's downward progress. Personal consumption expenditures (PCE) excluding food and energy, known as "core" PCE and the Fed's preferred inflation metric, rose 2.9% from December 2022 to December 2023, for the lowest rate of annual growth since March 2021, the Bureau of Economic Analysis reported Jan. 26.