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Bank Stocks Plunge after Fed’s Decision to Keep Near-Zero Interest Rates

On Wednesday, the Federal Reserve held near-zero interest rates the whole day, saying it would maintain that level until the end of 2022. Following the announcement, bank stocks significantly declined in yesterday’s session. Citigroup Inc (NYSE: C), Wells Fargo & Co (NYSE: WFC), JPMorgan Chase & Co (NYSE: JPM), Morgan Stanley (NYSE: MS), Bank of America Corporation (NYSE: BAC), and Goldman Sachs Group Inc (NYSE: GS) stocks were all down at the close.

Firstly, the Federal Reserve said its target interest rate would be 0.10% through 2022, as there is a risk of long-term damage to the U.S. economy because of the COVID-19 pandemic. And this level is against retail, commercial, and other banks that earn interest on lending and their substantial cash holdings in customer accounts.

Secondly, the Fed promised to buy more assets. Its target is $80 billion a month in Treasurys and $40 billion in mortgage-backed securities.

Further, the central bank predicted GDP tumbling 6.5% in 2020 but rebounding to a 5% gain in 2021. And finally, the Fed expects unemployment to be 9.3% at the end of this year.

Naeem Aslam, the chief market analyst at AvaTrade, said:

“Lower for longer—that is where the Fed stands for now. Basically, the Fed is determined to maintain adequate liquidity in the system and they are ready to do whatever is required from them. The bottom line is that the market needed a cuddle from the Fed and they have given this.”

But not all support the Fed’s policy. The U.S. President Donald Trump attacked the institution, saying the Fed “is wrong so often”. Besides, Trump made his own forecast. He stated the U.S. would have “a very good Third Quarter, a great Fourth Quarter, and one of the best ever years in 2021”. Trump has also said the vaccine and cure for coronavirus would come soon.

Yesterday, shares of Citigroup fell 13.37% to $48.39, while Wells Fargo dropped 9.83% to $26.79 at the close. JPMorgan stock plunged by 8.34% to $97.21, Morgan Stanley stock closed 8.46% down at $44.57 per share. Goldman Sachs shares closed 9.08% down at $194.13. Bank of America stock lost 10.03%,

After hours, bank stocks slightly rebounded. For example, Wells Fargo shares went 2.13% up, Goldman Sachs stock jumped by 1.19%, Citigroup stock was 1.82% higher. Shares of JPMorgan traded 1.28% up after hours, Morgan Stanley stock added 1.64%.

Christopher Marinac, director of research at Janney Montgomery Scott LLC, said:

“There hasn’t been a happy medium in bank stocks. It’s a volatile time, so banks behave that way.”

In a recent market rally, bank stocks were the biggest winners. But as investors are worried about the uncertainty around how much the economic decline will affect loans, bank stocks will not rebound as fast as shares of other sectors.

Bank Stocks Plunge after Fed’s Decision to Keep Near-Zero Interest Rates

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