Wall Street Banks Return to Profits When Fed Withdraws Stimulus

Wall Street banks have been among the biggest beneficiaries of the pandemic-era trade boom, fueled by the massive injection of liquidity by the Federal Reserve into financial markets.

As the central bank nears the time to start cutting back on asset purchases, banks should profit again as increased volatility encourages clients to buy and sell more stocks and bonds, analysts say. , investors and executives.

The Fed has been buying government guaranteed bonds since March 2020, adding $ 4 trillion to its balance sheet, as part of an emergency response to the Covid-19 pandemic.

The strategy aimed to stabilize financial markets and ensure adequate access to capital for businesses and other borrowers.

It was successful, but also resulted in unprecedented levels of liquidity, helping stock and bond traders enjoy their most profitable times since the 2007-09 financial crisis.

Wall Street’s top five investment banks – JP Morgan Chase & Co, Goldman Sachs, Bank of America, Morgan Stanley and Citigroup – made $ 51 billion in additional trading revenue last year and in the top three quarters of 2021, compared to comparative quarters. in the year preceding the Covid, according to the company’s income statements.

The commercial windfall, along with a boom in global transactions, has helped bank stocks outperform the broader market. The KBW Bank index has risen 40 percent year-to-date, compared to a 19 percent gain for the S&P 500.

Now banks with large trading companies are expected to profit a second time as the Fed begins to pull back the stimulus, prompting investors to reorganize their portfolios again.

“As investors look to position themselves for this volatility, it creates an opportunity for us to create markets for them. And obviously that would lend itself to improved performance,” CFO Mark Mason told reporters. from Citigroup.

Fed Chairman Jerome Powell signaled in late September that the cut was imminent.

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