How banks will react to Fed rate hike next week?

Next week will be one of the biggest days this year for the market: Fed will meet and decide if they will raise the interest rate. Until now, it is widely expected that Fed will raise it as they are repeatedly hinted for months. It is almost a done deal. The big question is how bank stocks will react to the final decision.


Well, as a general rule, higher interest rates are good for banks and therefore their trend is definitely going up. This general trend will likely continue when all the other conditions keep constant. But this dose mean the immediate reaction must also be positive. Actually I think the chance is high that bank stocks may fall and probably hard. Here is why: Since Fed has telegrammed the rate hike intention for months, this possibility should have already been priced into the bank stocks as we have seen them moving up quite nicely in the past few months. When the final decision confirms the rate hike, the market often "sell the news". Actually this is what has consistently happened for bank stocks following Fed's decision to raise interests. In a less likely but still possible scenario that Fed surprises everyone without raising the interest, bank stocks will tank more severely. So I think bank stocks next week will likely be doing badly. If XLF goes up early next week before the Fed meeting, buying some puts could be a winning trade!