Would Fed offer US banks rate relief?

By Jonathan Stempel - Analysis

NEW YORK (Reuters) - U.S. banks may get some long-awaited relief if investors are right that the next Federal Reserve interest-rate change will be down, not up.

Nine months after it ended a string of 17 rate rises, the central bank on Wednesday hinted that when it next changes rates it might loosen monetary policy, or at least investors focused on the housing sector thought it did.

The Fed gave no timetable. And any action could be far in the future.

Yet a cut would be none too soon for banks that have since 2005 lamented the flat and in places "inverted" yield curve where long-term yields are the same as, or below, shorter rates.

Higher short-term rates force banks to pay more to borrow from customers through certificates of deposit. They make it tough to recoup such costs from lending.

"Historically, when the Fed eases, it's not a one-time event," said Mark Batty, an analyst at PNC Wealth Management in Philadelphia. "It would alleviate net interest margin pressure that banks have felt, and benefit earnings."

Investors rewarded lenders on Wednesday, pushing the 24-member Philadelphia KBW Bank Index .BKX up 3.27 percent. That was double the gain in the Standard & Poor's 500 .SPX, and the KBW index's biggest gain in four years.

Bank shares had lagged in recent months amid mounting losses from riskier, "subprime" mortgage borrowers.

Many banks had in January projected the inverted curve would persist through much or all of 2007.

"(We expect) the yield curve will be inverted by somewhere between 25 to 40 basis points for the entire year," said Tom Wurtz, chief financial officer of Wachovia Corp. WB.N, the No. 4 U.S. bank. "Not a terribly appealing environment."

A basis point is a hundredth of a percentage point.

"We view the flat curve to be with us for a while," said Joe Price, chief financial officer Bank of America Corp. (BAC.N), the No. 2 bank.

"We get tired of waiting for the yield curve to improve," said Vernon Hill, chief executive of Cherry Hill, New Jersey's fast-growing Commerce Bancorp Inc. CBH.N.

"ADJUSTMENTS," NOT "FIRMING"

Explaining its decision to maintain its target 5.25 percent short-term rate, the Fed on Wednesday emphasized more strongly than in its comparable January statement that excessive inflation could slow economic growth.