U.S. banks in cross-hairs as Powell could help and hinder

From Reuters - November 3, 2017

NEW YORK (Reuters) - With the announcement of Jerome Powell as the new Federal Reserve Chair, banks are likely to see a battle between a boost from deregulation supported by the new Fed leader and the challenge of a flattening yield curve as monetary policy is likely to remain on course.

A steepening yield curve is seen as a boon to banks, as they borrow on lower shorter-term rates and lend on higher long-term rates, which helps generate profits through increased net interest margins. But the curve has flattened under current Fed policy which is expected to continue under Powell, who has worked alongside current Fed Chair Janet Yellen for the past five years.

The shape of the Treasury yield curve, which plots the yields of the various debt securities issued by the U.S. government, often reflects investors perceptions of the health of the economy and the outlook for inflation.

A steeper curve, when long-term yields rise relative to shorter-dated yields, typically augurs brisker economic growth and inflation. A flatter one, when the gap between short and long term yields narrows, most often occurs as the Fed is raising short-term interest rates as it is now, and signals a muted outlook for both growth and inflation.

However, investors are likely to welcome Powells view on deregulation, as he has gone further than his colleagues in calling to relax some of the rules put in place to limit banks in the wake of the financial crisis.

The S&P bank index jumped nearly 18 percent in November 2016 in anticipation of U.S. President Donald Trumps policies to stimulate the economy.

It then cooled in 2017, with a gain of 2.9 percent through the end of August. Gains have picked up steam since then, as the index has climbed more than 10 percent, buoyed by a rise in the benchmark U.S. 10-year note yields, quarterly earnings results from financials and increased expectations for a rate hike by the U.S. Federal Reserve in December.


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