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Sector Snap: Banks higher ahead of Fed statement

BOSTON (AP) -- Bank stocks were expected to get a modest lift ahead of a policy statement Wednesday from the Federal Reserve, which is likely to keep in place aggressive measures to keep the economic recovery on track.

The Fed is expected to maintain its policy of keeping borrowing costs at record lows, and also plans to issue new economic forecasts after its two-day meeting ends Wednesday afternoon. Fed Chairman Ben Bernanke recently told Congress that he doesn't want to endanger the recovery's momentum despite recent signs that hiring and housing sales are picking up.

Sterne Agee analyst Todd Hagerman said in a note to clients on Wednesday that the Fed will acknowledge the economy's improvements but leave the stimulative policies unchanged. He views that as positive for bank stocks.

"Our sense is that consistency in the Fed's outlook could further provide a tailwind to the sector," Hagerman said.

The analyst noted that bond yields have climbed modestly in recent weeks, in part due to rising optimism that economic growth will accelerate. Those developments, along with recent gains in the labor and housing markets, are "all positive signs for the (bank) sector to move higher," Hagerman said.

Bank stocks have outperformed the broader stock market since June, the analyst said, adding that "the Fed's evolving economic outlook will remain a ballast for bank valuations."

More than some other industries, financial companies are tied tightly to interest rates because they make money by charging more in interest on their loans than they pay in interest on the deposits they hold. While low interest rates crimp the profits that banks can make from lending, they also control the costs for deposits, often one of their biggest expenses.

The KBW bank index, made up of the 24 largest banks, was up about 0.4 percent in morning trading, in line with the broader market.

Shares of Bank of America Corp. led the group, rising 46 cents, or 3.8 percent, to $12.57.

Other companies gained less than 1 percent, including Citigroup, up 37 cents to $46.15; Goldman Sachs, up 83 cents to $149.67; Morgan Stanley up 17 cents to $22.56; and JPMorgan up 4 cents to $49.24.