Regional bank stocks are rallying.

The reason: Fed Chair Jay Powell. And maybe Donald Trump too.

The boss of the central bank made it clear over the last week that the Fed is inching closer to cutting interest rates. Powell’s colleagues dropped some of the same hints Wednesday, with one Fed governor giving a speech titled "Getting Closer."

An easing of monetary policy after two years of tightening would come as a great relief for midsize banks across the US that have been struggling with the impact of high rates on their profits and their borrowers.

Such optimism helped boost an index tracking regional banks (KRE) by 17% over the last seven trading days. It is now up more than 8% for the year.

The individual stocks of several well-known regional banks also surged over the last week, including PNC (PNC) and US Bancorp (USB).

"A lot of this, we've been saying for a while, 'It's better than you understand,'" Chris Marinac, a regional bank analyst with Janney Montgomery Scott, told Yahoo Finance.

"Now it feels like people have decided, ‘Oh, it's better than we understand. We should own some of these stocks,'" he added.

Regional bank investors also appear encouraged by Trump’s 2024 presidential campaign, which got a boost after a calamitous debate performance from President Joe Biden seemed to increase the odds of a second Trump term.

They found more reasons to cheer this week when Trump picked Sen. J.D. Vance as his vice presidential nominee, adding a voice to the GOP ticket that has shown some sympathy for the plight of midsize lenders.

Vance, for example, has questioned a regulatory proposal that would require large regional banks to hold greater buffers against future losses.

He also raised concerns last year about a decision by regulators to sell the operations of the failed First Republic bank to JPMorgan Chase (JPM) instead of a smaller regional lender — a view also shared by Democratic Sen. Elizabeth Warren.

Regional banks are certainly more stable than they were in the spring of 2023, when the seizure of three sizable lenders triggered widespread panic about the stability of midsize financial institutions.

If the Fed begins lowering rates, regional banks will immediately see more relief as they lower rates they pay to depositors, Alexander Yokum, a regional bank analyst with CFRA, told Yahoo Finance.

Lower rates would also be "good for the commercial real estate specifically, office, and then also the securities portfolios," Yokum added.

But it’s clear that at the moment, these banks still face plenty of challenges, despite the recent bout of optimism.

Between Tuesday and Wednesday, large regional banks PNC, US Bancorp, and Citizens Financial (CFG) posted second quarter results showing their net interest income fell from the year-ago period.

Net interest income is a key measure of profitability showing the difference between what banks make from their loans and pay out in their deposits. Regional banks rely more heavily on this income than the industry giants.

Yet the stock prices of those three banks still have surged 9.3%, 11%, and 11.6%, respectively, over the last five days.

Executives from these banks offered encouragement to analysts about the outlook for the second half of the year and 2025.

“We feel good about our positioning for rate cuts," US Bancorp CFO John Stern told analysts Wednesday.

PNC CEO Bill Demchak told analysts Tuesday that "we are on a growth trajectory towards expected record net interest income in 2025."

Citizens CEO Bruce Van Saun said "we're kind of prepared for a slog here on office" after reporting that profits fell 18% from a year earlier and the bank wrote off more loans tied to commercial offices.

But “if the Fed starts to move rates down, that could also start to move things in the other direction,” he added.

Marinac warned that the stocks of regional banks could still quickly see a “meaningful pullback,” as has happened several times in the past year.

"I do think folks are jumping the election trade very early, but it also is because the stocks were ignored and so cheap,” Marinac said.

"The market's so short-term oriented that it may darn well love banks today and hate them by Friday."

David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.

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