By Orla McCaffrey

Global and U.S. bank stocks fell Thursday, a day after Federal Reserve officials highlighted the coronavirus pandemic's potential to weaken the U.S. economy over the long term.

Shares of Citigroup Inc., Bank of America Corp., Wells Fargo & Co. and Goldman Sachs Group Inc. closed down between 9% and 13%.

The Fed's prediction that some damage to the labor market could last for years, coupled with projections that the economy could shrink as much as 10% this year, pushed financial stocks, often a bellwether of economic health, down more than the broader market.

The S&P 500 financials sector shed 8.2%, closing in correction territory and marking its worst day since mid-March. The S&P 500 lost 5.9%.

And Fed officials' announcement that they had no plans to raise short-term interest rates through 2022 is weighing on financial stocks. The Fed slashed its key rate to a range between 0% and 0.25% in March, part of a flurry of monetary-policy decisions to try to blunt the pandemic's impact on the economy and financial markets.

"We're not thinking about raising rates. We're not even thinking about thinking about raising rates," said Federal Reserve Chairman Jerome Powell.

Lower interest rates make it more difficult for banks to profit from lending, a key revenue source.

Financial stocks haven't enjoyed the same recovery in recent weeks as shares in other sectors. The S&P 500 financials sector has fallen 25% so far this year, while the overall index is down 7%.

The KBW Nasdaq Bank Index fell 9% Thursday, three days after reaching its highest level since early March. It plummeted as much as 50% earlier this year before paring about half of its losses.

The KBW Nasdaq Regional Banking Index dropped 9.5%. Regional banks tend to rely more heavily on lending income than the largest banks, meaning their stocks are often more sensitive to interest-rate projections. CIT Group Inc. and Fifth Third Bancorp slid 13% and 12%, respectively, on Thursday.

Investors are also concerned about the uncertainty around how much the economic decline will sour loans this year, said Christopher Marinac, director of research at Janney Montgomery Scott LLC.

Banks including Wells Fargo, JPMorgan and Citigroup said this week they would set aside at least as much in reserves for potential losses as they did in the first quarter.

The decline comes after financial stocks rose quickly in the first week of June.

"There hasn't been a happy medium in bank stocks," Mr. Marinac said. "It's a volatile time, so banks behave that way."

Write to Orla McCaffrey at orla.mccaffrey@wsj.com 



  Corrections & Amplifications


  This item was corrected on June 12, 2020 to show that The KBW Nasdaq Bank Index earlier this week reached its highest level since early March, not its highest level this year.