Financial stocks go positive after FOMC

SAN FRANCISCO (MarketWatch) � Financial stocks broke into positive territory Wednesday after the Fed pledged to keep interest rates low until late 2014.

The Financial Select Sector SPDR ETF XLF �which tracks the financial stocks in the S&P 500 SPX , closed up 0.2% to $14.20, after being down as low as 0.9%. The SPDR S&P Bank ETF KBE �closed up 0.6%.

The sector, trailing the broader market, went positive after the Federal Reserve announced that it would keep rates in the 0% to 0.25% range for about six months longer than expected. Many were expecting rates to remain unchanged until mid-2014. Read more on the Fed.

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�This is generally positive for financials,� said John Canally, investment strategist and economist for LPL Financial. �Banks are doing what they�re doing lending and this will keep the momentum going. It�s more of a psychological thing.�

Canally said an extra six months of low rates will likely give businesses more confidence in lending to make hires and capital purchases.

From a market perspective, however, he said announcements from the majority of recent Federal Open Market Committee meetings have only had a short-term effect on the market.

Since 2009, 22 out of 24 FOMC announcements changed the direction of the market that day, he said. But five days later, it�s been in the same direction it was before the announcement, Canally added.

The Fed also set a long-term inflation goal of 2%, and forecast GDP growth of 2.2% to 2.7% this year. More on Fed forecasts.

The best performers in the sector included Zions Bancorp. ZION �, Huntington Bancshares Inc. HBAN �, Moody�s Corp. MCO �, and blue-chip Travelers Cos. TRV �

Goldman Sachs Group Inc. GS shares pared losses by the end of the day with a 0.6% loss.

Analysts at J.P. Morgan Cazenove downgraded the firm and said that rules proposed by U.S. banking agencies late last year could lead to increased capital requirements for investment banks.

Along with Goldman, the analysts also downgraded Morgan Stanley MS �shares. Morgan Stanley shares, which had been down about 2% earlier, were off 0.1% by the close.

Shares of State Street Corp. STT �and Bank of New York Mellon Corp. BK �were also hit, closing down more than 3% on the day.

Click to Play Can Bernanke save the economy?

WSJ 'Mean Street' host Evan Newmark leads a discussion about whether the Federal Reserve's decision to keep interest rates low for several years is a good move for the U.S. economy. Reuters photo.

Financials also faced head winds following President Barack Obama�s State of the Union address Tuesday evening. The president proposed that Congress approve a bank tax to fund a massive mortgage refinance program. Analysts, however, are skeptical that such a tax could pass Congress. Read more on what analysts think of the bank tax.

Among the other Dow DJIA �financials, Bank of America Group. BAC �and American Express Co. closed higher, while J.P. Morgan Chase & Co. JPM declined on the day.

Citigroup C �shares rose 0.2% after being down about 2% earlier.

On Wednesday, Reuters reported that Citi may make further staff cuts if at its securities and banking unit if business does not improve.