Bank shares buoy Wall Street as Fed signals possible June hike

By Lewis Krauskopf

(Reuters) - Wall Street closed flat on Wednesday after a volatile session, supported by bank shares, as the minutes from the Federal Reserve's April meeting signaled a potential interest rate increase in the near term.

Officials from the U.S. central bank said it would be appropriate to raise interest rates in June if economic data points to stronger second-quarter growth as well as firming inflation and employment, according to the minutes.

Following the release of the minutes, traders were projecting a 34 percent chance the Fed would raise rates in June, up from 15 percent on Tuesday, according to the CME FedWatch tool. For July, traders see a more than 50 percent chance of rates rising.

"It did catch the market by surprise," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama. "The discussion going forward will be, is the economy strong enough to take another rate hike, how do the markets respond between now and the June meeting."

The Dow Jones industrial average <.DJI> fell 3.36 points, or 0.02 percent, to 17,526.62, the S&P 500 <.SPX> gained 0.42 points, or 0.02 percent, to 2,047.63, and the Nasdaq Composite <.IXIC> added 23.39 points, or 0.5 percent, to 4,739.12.

The S&P and Dow, which had been solidly higher ahead of the minutes, turned negative after their release before recovering somewhat.

Financials <.SPSY>, seen benefiting in a rising rate environment, were the best-performing sector, closing up 1.9 percent for their best single-day session in a month. JPMorgan (NYSE: JPM) gained 3.9 percent and Bank of America rose (NYSE: BAC) rose 4.9 percent.

Utilities <.SPLRCU>, a high-dividend-paying group that tend to be sold when the expectation of higher rates increases, were the biggest laggards as seven of the 10 sectors ended in the red.

Fed policymakers said recent data made them more confident inflation was rising toward the Fed's 2 percent target, and that they were less concerned about a global economic slowdown, according to the minutes of the April 26-27 meeting. The Fed increased rates in December for the first time in nearly a decade.

"I think it is high time that the Federal Reserve starts to normalize policy. We’ve tried this for seven years; let’s try something new," said Jim Paulsen, chief investment strategist with Wells Capital Management in Minneapolis. "I really think markets are going to be OK with this."

The S&P 500 is little changed for 2016. While the benchmark index has risen about 13 percent since February lows, the rally has fizzled out in the last few weeks amid mixed corporate earnings and economic data.

Retail stocks, which were roiled last week by poor results from department stores, remained under pressure after Target Corp (NYSE: TGT) fell 7.6 percent to $68 as its quarterly sales missed expectations.

About 8 billion shares changed hands on U.S. exchanges, above the nearly 7.3 billion daily average for the past 20 trading days, according to Thomson Reuters data.

Declining issues outnumbered advancing ones on the NYSE by 1,989 to 1,043, for a 1.91-to-1 ratio on the downside; on the Nasdaq, 1,636 issues rose and 1,170 fell for a 1.40-to-1 ratio favoring advancers.

S&P 500 companies posted eight new 52-week highs and seven new lows; the Nasdaq recorded 23 new highs and 55 new lows.

(Additional reporting by Rodrigo Campos in New York, Editing by Nick Zieminski and Steve Orlofsky)

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