The Fed's policy shift has led some investors to bet that bank of america stocks are expected to rise, as the rate cut will provide much-needed support for some struggling banks. This bet drove the KBW nasdaq regional bank index, which tracks mid-sized regional banks, to rise 5% last Friday, marking the largest single-day gain for the index since 2024.

Fed Chairman Powell's statement at last Friday's Jackson Hole Global Central Bank Annual Meeting said,'We are neither seeking nor welcoming further cooling of the labor market, the upside risks to inflation have diminished, while the downside risks to employment have increased, now is the time to adjust the policy.' Such wording has been seen by the outside world as a direct hint that the Fed will start cutting interest rates in September.

The KBW nasdaq regional bank index has risen nearly 5% so far this year, lagging behind the KBW bank index, which tracks the broader banking industry and has risen over 18% year-to-date. Yardeni Research's Chief Market Strategist, Eric Wallerstein, said, 'There may be catch-up trades for regional banks.' He added that the Fed's gradual interest rate cuts over the next six months 'will be very helpful for those banks with quite bad credit quality.'

In fact, New York Community Bancorp (NYCB.US) and valley national bancorp (VLY.US), two regional banks with a large loan exposure to weak commercial real estate, both rose by over 8% last Friday.

However, rate cuts are not an automatic victory for banks, especially if the Fed ends up increasing the rate cut amplitude or accelerating the pace of rate cuts to prevent an economic downturn. Eric Wallerstein said, 'For banks, the worst result now is definitely an economic slowdown.'

Ibrahim Poonawala, a bank of america stocks analyst at BofA Securities, said that the slower the Fed's interest rate cuts, the greater the opportunity for banks to adjust their balance sheets. For many banks, the biggest benefit of the Fed's rate cut is that they can reduce the interest paid to depositors, and lower interest rates may also reduce the unrealized loss level of regional bank bond portfolios. These are important steps to raise bank net interest margins. However, floating rate loans and bond yields for banks will also start to decline, which could push the profit margin in the other direction.

Ibrahim Poonawala said, 'Over the next one or two quarters, you may see a negative impact from the faster repricing of assets than financing costs, and we are still waiting for loan demand to rebound, which will be a drag.'

Editor/ping