Wall Street banks bet on Federal Reserve increasing interest rates

Fed stays pat on interest rates

Big banks aren't giving up on a rate hike just yet, and their most recent comments reinforce that.

Many Wall Street banks are pricing in expectations for an interest rate rise from the Federal Reserve, which would be a shot in the arm for their businesses.

Economists see rising optimism from the Federal Open Market Committee, which could lead to the first interest rate increase of 2016. Wall Street banks began the year thinking (or, hoping) that the Fed would raise rates repeatedly this year, only to see those hopes dashed after June's Brexit vote and a weak U.S. jobs number in May.

Simon Webb and Duncan Nicholls | Getty Images

"These changes were modest but in an optimistic direction, and the improved risk assessment could begin to lay the groundwork for a hike in a few meetings' time, provided the data cooperate," wrote JPMorgan economist Michael Feroli on Wednesday. "We continue to look for a second rate hike in December, and we still believe we'd need to see some blockbuster employment and inflation data to make September a realistic possibility."

Blowout jobs numbers are exactly what the market got from the June data, which was released earlier this month, but it was too little, too late, for the FOMC, which watched as the post-Brexit freakout dashed any expectations of a summer interest rate hike.

Others do see September as a realistic possibility for an interest rate increase. Goldman Sachs analysts on Wednesday raised their expectations for a September rate hike to 30 percent from 25 percent and also upped their odds for a rate rise in December, after hearing the FOMC say it sees near-term risks to its economic outlook lessening.

Now, the market is processing its Brexit reaction as if some fears were overblown. U.S. bank stocks have mostly rebounded from second-quarter lows, and the market has rallied past lows that came in late June after the U.K. vote.

"The FOMC is acknowledging the post-Brexit calm in the markets, but is still cognizant about the uncertainties in the global economic outlook," Bank of America Merrill Lynch economists wrote Wednesday. "We continue to believe that a September hike is unlikely, but expect conditions to be met by December to justify a rate hike, assuming no additional shocks."

Correction: This story has been updated to reflect that strong jobs data were reported earlier this month and that the market dropped in late June.

— CNBC's Patti Domm contributed to this report.