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Prime Rate

also known as the Fed, National, U.S. and WSJ Prime Rate,
from the interest rate specialists at FedPrimeRate.comTM

Friday, October 31, 2008

Futures Market 100% Certain The Fed Will Cut Short-Term Rates Again On December 16

prime rate forecastFormer Federal Reserve Chairman Alan Greenspan has had to contend with lots of criticism for keeping the benchmark fed funds target rate (FFTR) at 1.00% for too long. The Greenspan Fed cut the FFTR to 1.00% on June 27, 2003, and kept it there until July 1, 2004. Some economists believe all that exceptionally cheap money that was sloshing around in the economy 5 years ago contributed to the financial mess we find ourselves in today.

So now, the big question: is the Bernanke Fed willing to take the FFTR below 1.00% in an effort to stave off a long and painful recession? According to the fed funds futures market, the answer is a firm yes. The futures market is currently 100% confident that the Fed will opt to cut short-term rates again at the next Federal Open Market Committee (FOMC) meeting on December 16, with a majority in the market betting on another 50 basis point (0.50 percentage point) cut.

Here are some factors that (likely) influenced the futures market this week:

  • On Tuesday, The Conference Board reported that its Consumer Confidence Index (CCI) fell to 38.0, the lowest level ever for the metric. For the CCI, the baseline "100" score is pegged to 1985 survey data.

    Earlier today, the University of Michigan reported that its Consumer Sentiment Index fell from 70.3 for September to 57.6 for October. The baseline "100" score is pegged to 1966 survey data.

  • On Monday, the Commerce Department reported that the median cost for a newly built home fell from $220,400 for August to $218,400 during September. Click here for historical prices and a chart.

  • On Thursday, the Commerce Department reported that the Gross Domestic Product declined by 0.3% during the third quarter of this year.

  • Earlier today, the Commerce Department reported that consumer spending fell by 0.3% during September.

  • Late this afternoon, JP Morgan Chase, the second largest bank holding company in the United States[1], announced that:

    "...it is expanding its already significant mortgage modification program by undertaking multiple initiatives designed to keep more families in their homes, including extending its modification programs to WaMu and EMC customers..."

    Here's another snippet from today's press release:

    "...The enhanced program is expected to help 400,000 families - with $70 billion in loans - in the next two years. Since early 2007, Chase, WaMu and EMC have helped about 250,000 families - with $40 billion in loans -- avoid foreclosure, primarily by modifying their loans or payments. Both the existing and enhanced programs apply only to owner-occupied properties with mortgages owned by Chase, WaMu or EMC, or with investor approval.

    Chase inherited pay-option ARMs when it acquired WaMu's mortgage portfolio last month and EMC's portfolio earlier this year as part of the Bear Stearns acquisition. After reviewing the alternatives that were being offered to customers, Chase decided to add more modification choices. All the offers will eliminate negative amortization and are expected to be more affordable for borrowers in the long term..."
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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the December 16TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the December 16TH, 2008 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Friday, October 24, 2008

Futures Market 100% Certain Fed Will Cut The Prime Rate on Wednesday

prime rate forecastThe fed funds futures market is still 100% certain that the Fed will cut short-term rates, including the U.S. Prime Rate, by at least 25 basis points (0.25 percentage point) on Wednesday. Here are some items that probably has some influence on the futures market this week:

  • Earlier today, the National Association of Realtors® reported that sales of existing homes ticked up by 5.5% last month, but home prices fell. The median cost for a preowned home fell from $203,100 for August to $191,600 during September. The average price for a used home fell from $245,400 for August to $234,700 during September. Click here for historical prices and a chart.

  • Since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) has now lost 5,785.58 points (40.846%), while the broader S&P 500 Index has given up 688.38 points (43.982%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15.

  • In New York, crude oil for future delivery closed at $64.15 per barrel earlier today. That's a retreat of $42.74 (39.985%) since crude closed at $106.89 per barrel on September 26, 2008.

  • On Wednesday, the Federal Reserve announced that it's going to raise the interest rate paid to banks that have excess balances on deposit at the Fed.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the October 29TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the October 29TH, 2008 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Monday, October 20, 2008

Fed Boss Ben Bernanke Thinks Congress Should Consider Another Stimulus Package

economic stimulus paymentThe rate cut that is very likely to occur on October 29 will be very welcome for businesses and consumers looking for loans and favorable credit card deals, and for those struggling with debt. The odds that the Fed will opt to cut short-term rates by at least 25 basis points (0.25 percentage point) at the end of the month are still 100%, and the odds of a 50 basis point cut for October 29 cut have been increasing as the next Fed meeting approaches.

Rate cuts are great for boosting economic activity, but another stimulus package could do even more for this anemic U.S. economy, especially since many American banks have responded to the current credit crisis by hoarding the capital in their vaults instead of lending it out.

If you've been hoping for another stimulus package from Congress, then you'll like what Fed Boss Ben Bernanke had to say before the Committee on the Budget of the U.S. House of Representatives earlier today. Here's a clip:

"...I understand that the Congress is evaluating the desirability of a second fiscal package. Any fiscal action inevitably involves tradeoffs, not only among current needs and objectives but also--because commitments of resources today can burden future generations and constrain future policy options--between the present and the future. Such tradeoffs inevitably involve value judgments that can properly be made only by our elected officials. Moreover, with the outlook exceptionally uncertain, the optimal timing, scale, and composition of any fiscal package are unclear. All that being said, with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate..."

And here's what House Speaker Nancy Pelosi had to say about Ben Bernanke's remarks:

“Chairman Bernanke made it clear that a new economic recovery package is critical to boost our weakening economy. In testimony today before the House Budget Committee, Chairman Bernanke added his voice to the chorus of economists, experts and policymakers who insist that America needs a job-creating recovery package to get our economy back on track and to restore consumer and investor confidence.

“At a time when Americans are struggling with rising costs and weakened retirement security, and a growing number of workers are losing their jobs, I call on President Bush and Congressional Republicans to once again heed Chairman Bernanke’s advice and as they did in January, work with Democrats in Congress to enact a targeted, timely, and fiscally responsible economic recovery and job creation package.”

Some in Congress want the new stimulus checks to be twice as large as the ones issued earlier this year, but considering the cost, it's tough to predict whether a new package would include bigger checks for American consumers. Stay tuned.

Here are some video clips from Ben Bernanke's comments earlier today:







Another piece of positive news today: the TED spread was 3.62875 percentage points on Friday. Today it declined to 2.82875 points, which is a strong indication that the frozen credit market are starting to thaw.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the October 29TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the October 29TH, 2008 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Friday, October 17, 2008

Tame Inflation Gives Fed Room To Cut Short-Term Rates Again At The October 29 Fed Meeting

burning bullThe week's economic reports as well as a sharp decline in crude oil prices give the Fed plenty of room to cut short-term interest rates again at the October 29 Federal Open Market Committee (FOMC) meeting:

  • On Wednesday, the Labor Department reported that the Producer Price Index (PPI) declined by 0.4% during September; on Thursday, it reported that the Consumer Price Index (CPI) for September was flat, i.e. consumer price moved sideways last month.

  • Also on Wednesday, the Commerce Department reported that retail sales declined by 1.2% during September. Wall Street economists were expecting a dip of about 0.6% for last month.

  • On Thursday, the Federal Reserve Bank of Philadelphia reported that its diffuse index of current manufacturing conditions declined to -37.5 this month. Wall Street economists were expecting the index to come in at around -10.0 for October. Also from the Fed on Thursday: industrial production declined by 2.8% during September. Wall Street economists were expecting a retreat of about 0.5%.

  • On Friday, the Commerce Department reported that housing starts declined by 6.3% last month, while building permits declined by 8.3%.

  • In New York, crude oil for future delivery closed at $71.85 per barrel. That's a decline of $35.04 (32.781%) since crude closed at $106.89 per barrel on September 26.
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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the October 29TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the October 29TH, 2008 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Friday, October 10, 2008

Futures Market 100% Certain Fed Will Cut Short-Term Rates Again At The October 29 Fed Meeting

stock market crashAs defined by Wikipedia.org, a stock market crash is:

"...[a] double-digit percentage losses in a stock market index over a period of several days..."


The stock market crashed this past week. For the week, the Dow Jones Industrial Average (DJIA) lost 1,874.19 points (-18.151%) to close at 8,451.19, while the NASDAQ Composite Index gave up 297.88 points (-15.296%) to close at 1,649.51. The S&P 500 Index declined by 200.01 points (-18.195%) to close at 899.22.


Also from Wikipedia.org, a bear market is thus defined:

"...a bear market is not a simple decline, but a substantial drop in the prices of the majority of stocks in a given market over a defined period of time. According to The Vanguard Group, "While there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period..."
And now for the bear market update.

Since closing with record highs on October 9, 2007, the DJIA has now lost 5,713.34 points (40.336%), while the S&P 500 Index has declined by 665.93 points (42.547%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15. The DJIA was reconfigured recently.

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The NASDAQ Composite is a unique, tech-heavy index, so we won't include it in the bear market update. Heck: let's do the numbers for NASDAQ anyway, just for fun.

The record high for the NASDAQ Composite Index -- 5,048.62 -- was set on March 10, 2000; it finished the week at 1,649.51. That's a decline of 3,399.11 points (67.328%).


Banks are still extremely wary of lending to other banks, despite the highly coordinated round of rate cuts executed by central banks across the industrialized world on Wednesday. We can find the best evidence of this by observing where the Eurodollar LIBOR rates ended the week. The 3-Month LIBOR yield finished the week 0.31875 percentage point above the U.S. Prime Rate, and an extraordinary 4.63875 percentage points above the yield on the 3-Month Treasury Bill (click here to learn about the TED Spread.) Translation? Banks across the globe see default risk everywhere, and are therefore very reluctant to lend money. The money is there, they're just hoarding it.

The only good news this week? The cost associated with filling your car or truck with gas or diesel is very likely to decline significantly within the next few business days. Crude oil for future delivery ended the week at $77.70 per barrel in New York; that's a decline of $29.19 (27.308%) since the price on light, sweet crude closed at $106.89 per barrel on September 26, 2008.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the October 29TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the October 29TH, 2008 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Tuesday, October 07, 2008

The Federal Reserve Is Changing With The Times

federal reserveIs it possible that the global financial crisis could produce a painful global depression? Yup, and the Fed knows it. The Federal Reserve is adapting to the current economic environment by making very significant changes to its own rules and regulations:

  • Banks can now earn interest on the required and excess cash reserves they have with the Fed. Here's a clip from yesterday's press release:

    "...The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008.

    Employing the accelerated authority, the Board has approved a rule to amend its Regulation D (Reserve Requirements of Depository Institutions) to direct the Federal Reserve Banks to pay interest on required reserve balances (that is, balances held to satisfy depository institutions’ reserve requirements) and on excess balances (balances held in excess of required reserve balances and clearing balances)..."

  • The commercial paper market -- where unnumbered American companies go to get short-term loans for things like payroll and inventory -- has all but seized up as a result of the credit crisis. In an effort to unfreeze this market, the Fed is now in the business of buying both unsecured and asset-backed commercial paper directly from eligible issuers. Here's a clip from today's press release:

    "...The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper, especially at longer-dated maturities. As a result, the volume of outstanding commercial paper has shrunk, interest rates on longer-term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day. A large share of outstanding commercial paper is issued or sponsored by financial intermediaries, and their difficulties placing commercial paper have made it more difficult for those intermediaries to play their vital role in meeting the credit needs of businesses and households...."

In other Fed news: in a speech today, Ben Bernanke provided a pretty strong hint that a cut for short-term interest rates is on its way. Here's a clip from today's speech:

"...Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate..."

Is this a good time for a bear market update? Sure, why not. Since closing with record highs on October 9, 2007, the DJIA has now lost 4,717.42 points (33.304%), while the broader S&P 500 Index has shed 568.92 points (36.349%.), as of today's close.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at or before the October 29TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at or before the October 29TH, 2008 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Monday, October 06, 2008

Futures Market Still 100% Certain Fed Will Cut The Prime Rate At Or Before The October 29 Fed Meeting

recession?Last Friday, Congress enacted a new law that will allow the federal government to buy the unpriceable and unwanted debt that has caused turmoil in financial markets around the globe. Despite the new law, and despite a recent and significant decline in crude oil prices, foreign and domestic equities declined on Friday and today.

It's not just the difficult mix of problems in global credit markets that are dragging stocks down. Recent and discouraging economic data are also playing a roll:

  • Last Friday, the Labor Department reported that the already anemic U.S. economy got weaker by 159,000 jobs last month. Wall Street economists were expecting a decline of about 100,000 jobs for September.

  • Last Wednesday, the Institute for Supply Management reported that its Purchasing Manager's Index (PMI) declined precipitously; from 49.9% for August to 43.5% for September. Any figure above 50% suggests that, in general, the American manufacturing sector is expanding, while any figure below 50% suggests contraction for a particular month.

  • Last Thursday, the U.S. Census Bureau reported that factory orders declined by 4.0% during August. Wall Street economists were expecting a decline of 2.5%.

Bear Market Update
Since closing with record highs on October 9, 2007, the DJIA has now declined by 4,209.03 points (29.715%), while the S&P 500 Index has lost 508.26 points (32.474%.)

Crude oil for future delivery is currently trading at $88.74 per barrel; that's a decline of $58.53 (39.74%) since crude hit a record high of $147.27 per barrel on July 11.

Wealth continues to flow to the safety of U.S. Treasuries. The yield on the benchmark 10-Year Treasury note fell to 3.426% earlier today.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at or before the October 29TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at or before the October 29TH, 2008 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Monday, September 29, 2008

Futures Market 100% Certain Fed Will Cut The Prime Rate At Or Before The October 29 Fed Meeting

Capitol buildingEarlier today, the U.S. House of Representatives said "no" to the Bush administration's plan to spend around $700 billion to buy up the bad debt that has brought Wall Street to its knees. The vote was 228-205. Investors reacted to the failed bill by selling, hard. At today's close, the Dow Jones Industrial Average (DJIA) lost 777.68 points (6.98%) to close at 10,365.45. The broader S&P 500 Index shed 106.62 points (8.79%) to close at 1,106.39.

A good time for a bear market update:

  • Since closing with record highs on October 9, 2007, the DJIA has now declined by 3,799.08 points (26.821%), while the S&P 500 Index has given up 458.76 points (29.311%.)

In other news, the federal government has brokered a deal in which Citigroup will buy the banking operations of Wachovia for $2.1 billion in stock; Citi will also take on $53 billion of Wachovia's debt. Last week, the Federal Deposit Insurance Corporation (FDIC) brokered a deal in which JPMorgan Chase bought the deposits, assets and certain liabilities of Washington Mutual's (WaMu) banking operations. WaMu had $188 billion in deposits; those customers are now Chase customers. Chase in now the #1 U.S. bank in terms of total deposits.

Shares of Wachovia (WB) fell 81.6% today to close at $8.16 per share, while shares of Washington Mutual are currently trading at $0.1604 per share.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at or before the October 29TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at or before the October 29TH, 2008 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Thursday, September 25, 2008

Futures Market 86% Certain Fed Will Cut The Prime Rate At The October 29 Fed Meeting

housingYesterday, the National Association of Realtors® released its report on sales of previously occupied homes for August. Nationwide, existing homes sales dropped by 2.2% last month, and were down 10.7% for the August 2007 - August 2008 period. The median price on a used home dropped to $203,100, while the average price dipped to $245,400. Click here for historical prices and a chart.

Earlier today, the Commerce Department reported that sales of newly built homes fell by 11.5% last month, and were down by 34.5% for the August 2007 - August 2008 period. The median price for a newly built home fell to $221,900, while the average price slid to $263,900. Click here for historical prices and a chart.

In other economic news:

  • New claims for unemployment benefits came in at 493,000 for last week, significantly higher than the 445,000 Wall Street economists were expecting.

  • New orders for durable goods -- items built to last at least 3 years -- declined by 4.5% for August. Economists were expecting a decline of about 1.6%.

With regard to the Bush Administration's plan to spend an estimated $700 billion to buy up distressed mortgage-backed securities and other toxic loans, President Bush had this to say:

"...Without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold..."

In testimony before Congress yesterday, Federal Reserve boss Ben Bernanke made these comments:

"...Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. In this regard, the Federal Reserve supports the Treasury's proposal to buy illiquid assets from financial institutions. Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions’ balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth..."
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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 86% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the October 29TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at
    the October 29TH, 2008 FOMC monetary policy meeting: 86% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Tuesday, September 16, 2008

Futures Market 98% Certain The Fed Will Cut Short-Term Rates Today

Fed rate decision: uncertainThe futures market is pushing hard for a rate cut today, but most Wall Street economists believe that the Fed will leave short-term rates unchanged when the Federal Open Market Committee (FOMC) adjourns its monetary policy meeting later this afternoon. So, even though the fed funds futures market is nearly 100% certain that the Fed will cut rates at 2:15 pm EST, in reality, the odds are about 50/50.
The reason for the uncertainty: the fate of insurance giant American International Group (AIG) is still unknown. Wall Street has no idea if AIG will be forced to declare bankruptcy or become the next major American financial institution to be rescued by a Fed-brokered bailout. Though nobody is willing to lend money to AIG, a rescue is the more likely scenario, since the company is solvent.

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As of Monday evening, the investors who trade in fed funds futures at the Chicago Board of Trade had odds at 98% (as implied by current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at today's monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds the Prime Rate will be cut by at least 25 basis points at today's
    FOMC monetary policy meeting: 98% (very likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Monday, September 15, 2008

Fed Futures Turnaround: Odds On A Rate Cut for Tomorrow Currently At 66%

Lehman Brothers, founded in 1850 and, until recently, America's fourth largest investment bank, filed a petition for Chapter 11 Bankruptcy in a New York court today. A government bailout was considered, but in the end, top officials in the federal government decided that if Lehman could not find a buyer, then Lehman should be left to die. The U.S. government bailed out Bear Stearns indirectly, and rescued mortgage giants Fannie Mae and Freddie Mac. Now the purse strings have been cinched. Shares of Lehman closed at $0.21 per share today. On September 17, 2007, the stock was trading at $57.59 per share.

Merrill Lynch fared better: yesterday, the Bank of America announced that it will purchase Merrill in a $50 billion, all-stock arrangement. Not a fire sale price, but pretty close.

Who would have thought that subprime lending would cause such mayhem and destruction on Wall Street, and change the American financial landscape forever.

The Bear Market Is Back

Investors reacted to the news of Lehman's downfall with extreme bearishness. The Dow Jones Industrial Average (DJIA) lost 504.48 points (4.417%) today, while the broader S&P 500 Index lost 59 points (4.714%). Shares of DJIA component American International Group (AIG) lost 7.38 points (60.791%) to close at $4.76 per share today. AIG shares were trading at $63.45 a year ago. AIG is strapped for cash. The insurance giant may go the way of Lehman Brothers if the company isn't able to get access to about $70 billion by Wednesday.

Since closing with record highs on October 9, 2007, the DJIA has now dropped 3,247.02 points (22.924%), while the S&P 500 has shed 372.45 points (23.796%.)


Perhaps the only piece of good news today: crude oil for future delivery is currently trading at $92.55 per barrel in New York. That's a decline of $54.72 (37.156%) since crude hit a record high of $147.27 per barrel on July 11 of this year. Cheaper crude translates to an improved inflation outlook, which in turn makes it easier for the Federal Open Market Committee (FOMC) to cut rates tomorrow, if the group decides a cut is necessary. If the stock market slide continues tomorrow morning, then the odds on a rate cut for tomorrow afternoon will increase dramatically. Stay tuned!

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As of Monday evening, the investors who trade in fed funds futures at the Chicago Board of Trade had odds at 66% (as implied by current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the September 16TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds the Prime Rate will be cut by 25 basis points at tomorrow's
    FOMC monetary policy meeting: 66% (more likely than unlikely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Monday, September 08, 2008

Futures Market 92% Certain Prime Rate Will Remain at 5.00% After September 16 Fed Meeting

The Federal National Mortgage Association (FNMA), a.k.a Fannie Mae, and the Federal Home Loan Mortgage Corporation (FHLMC), a.k.a Freddie Mac, are now under the conservatorship of the Federal Housing Finance Agency (FHFA). In other words, the U.S. government is now running both mortgage behemoths. The CEO's of both firms are being replaced with Wall Street veterans. Former Merrill Lynch vice chairman Herbert M. Allison will take the helm at Fannie Mae, while former US Bancorp chairman David M. Moffett will be the new boss at Freddie Mac.

How big are Fannie and Freddie? The two companies are associated with about half of America's $12 trillion mortgage market.

Nobody knows how much the bailout will cost American taxpayers, but estimates are in the tens of billions of dollars. Not a bad investment considering how important the two companies are to the well being of global financial markets. For some perspective, compare this estimate to the $12 billion per month price tag attached to the current Iraq war.

It's now abundantly clear that the government won't let the mortgage giants fail, so the mortgage-backed securities issued by Freddie and Fannie are now more attractive to investors on Wall Street. This will translate to cheaper fixed-rate mortgages for American home buyers. News of the government takeover was announced yesterday and, as a direct result, 30-year, fixed-rate mortgages got cheaper today.

The holders of Fannie and Freddie stock have not fared well since the two companies started to deteriorate:

  • On September 7, 2007, shares of Fannie Mae closed at $60.25 per share. Today, the stock lost 6.31 points (89.63%) to close at $0.73 per share.

  • On September 7, 2007, shares of Freddie Mac closed at $56.93 per share. Today, the stock lost 4.22 points (82.75%) to close at $0.88 per share.

Financial markets across the globe will cheer the takeover. Without a doubt, the Chinese government will breath a sigh of relief: 10% of China's GDP is invested in Fannie and Freddie.

--

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 92% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to leave the benchmark Federal Funds Target Rate at the current 2.0% at the September 16TH, 2008 monetary policy meeting. 4% in the market are betting on a 25 basis point (0.25 percentage point) cut next week, while the remaining 4% are betting that the Fed will opt for a 25 basis point increase.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will remain at the current 5.0% after the September 16TH, 2008 FOMC monetary policy meeting: 92% (likely)

  • Current odds that the Prime Rate will remain at the current 5.0% after the October 29TH, 2008 FOMC monetary policy meeting: 87% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Friday, September 05, 2008

Futures Market 88% Certain Prime Rate Will Remain at 5.00% After September 16 Fed Meeting

The fed-funds futures market had a number of attention-grabbing bits of economic news to digest this week:

  • From the Commerce Department: construction spending fell by 0.6% during July, while new orders for manufactured goods advanced by 1.3% during the same month.

  • On Tuesday, the Institute for Supply Management reported that its Purchasing Manager's Index (PMI) declined from 50.0 for July to 49.9% for August. This 0.1% difference may seem insignificant, but any figure above 50% suggests that, in general, the American manufacturing sector is expanding, while any figure below 50% suggests contraction. So, between the beginning of July and the end of August, American manufacturing went from stagnant to shrinking.

  • During the second quarter of 2008, non-farm productivity increased by 4.3%, while unit labor costs declined by 0.5%, according to a report released by the Labor Department on Thursday. Without a doubt, this is good news for American corporations and business owners: that guy or gal in the corner office is always looking for ways to run a more efficient shop and thus improve the company's bottom line. This particular piece of economic news isn't positive from a consumer spending perspective, however, since it implies that American workers were more productive while at the same time earned less money.

  • Earlier today, the Labor Department reported that the American economy shed another 84,000 jobs last month, and the unemployment rate jumped from 5.7% for July to 6.1% for August. The last time the U.S. economy actually added jobs was back in December of 2007.

  • A few hours ago, crude oil for future delivery ended the week at $106.23 per barrel. Crude hit a record high of $147.27 on July 11; that's a decline of $41.04 (27.867%.)

  • Wall Street money continued to move to the safety of U.S. Treasuries this week. The yield on the 10-Year Treasury Note fell from 3.813% on August 29 to 3.66% today.
--

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 88% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark Federal Funds Target Rate at the current 2.0% at the September 16TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will remain at the current 5.0% after the September 16TH, 2008 FOMC monetary policy meeting: 88% (likely)

  • Current odds that the Prime Rate will remain at the current 5.0% after the October 29TH, 2008 FOMC monetary policy meeting: 85% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Wednesday, August 27, 2008

Futures Market 92% Certain Prime Rate Will Remain at 5.00% After September 16 Fed Meeting

Yesterday's positive news that The Conference Board's Consumer Confidence Index (CCI) rose from 51.9 for July to 56.9 for this month was offset by new evidence that the North American banking sector still has some way to go before it's out of the woods. Here's a clip from a press release issued by the Federal Deposit Insurance Corporation (FDIC) yesterday:

"Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported net income of $5.0 billion in the second quarter of 2008, a decline of $31.8 billion (86.5 percent) from the $36.8 billion that the industry earned in the second quarter of 2007. With the exception of the fourth quarter of last year, the latest earnings were the lowest for the industry since the fourth quarter of 1991.

'By any yardstick, it was another rough quarter for bank earnings, but the results were not unexpected as the industry coped with financial market disruptions, the housing slump, worsening economic conditions and the overall downturn in the credit cycle,' said FDIC Chairman Sheila C. Bair.

The FDIC's 'problem list' grew to 117 institutions from 90 at the end of the first quarter. That is largest number on the list since the middle of 2003. Total assets of problem institutions increased from $26 billion to $78 billion, with $32 billion coming from IndyMac Bank, F.S.B., Pasadena, CA, which failed in July. 'More banks will come on the list as credit problems worsen,' Chairman Bair added. 'Assets of problem institutions also will continue to rise...'"

The FDIC believes that 117 American financial institutions are looking pale in the face. More bank failures on the way? Almost certainly.

--

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 92% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark Federal Funds Target Rate at the current 2.0% at the September 16TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will remain at the current 5.0% after the September 16TH, 2008 FOMC monetary policy meeting: 92% (likely)

  • Current odds that the Prime Rate will remain at the current 5.0% after the October 29TH, 2008 FOMC monetary policy meeting: 83% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Friday, August 15, 2008

Futures Market 88% Certain Prime Rate Will Remain at 5.00% After September 16 Fed Meeting

Inflation pressure continued to ease this week as the dollar enjoyed another week of gains against the euro. Here's another look at how the dollar and key commodities are doing right now:

  • New York Spot Gold closed at $964.60 on July 11. Today it closed at $786.00 per ounce. That's a decline of $178.6 (18.515%.)

  • Crude oil for future delivery finished at $113.77 per barrel today. Crude hit a record high of $147.27 on July 11; that's a drop of $33.50 (22.747%.)

  • On July 11, the euro bought $1.5937 dollars. Earlier today, the euro bought $1.4688 dollars.
--

The futures market has odds at 88% that the Federal Open Market Committee (FOMC) will leave the benchmark Fed Funds Target Rate at its current level of 2.0% when the group meets on September 16TH, 2008. 12% in the market are betting that the Fed will raise short-term rates by at least 25 basis points (0.25 percentage point) on September 16TH.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 88% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark Federal Funds Target Rate at the current 2.0% at the September 16TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will remain at the current 5.0% after the September 16TH, 2008 FOMC monetary policy meeting: 88% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Sunday, August 10, 2008

Futures Market 78% Certain Prime Rate Will Remain at 5.00% After September 16 Fed Meeting

Wall Street is feeling better about the outlook for inflation, as evidenced by the cost of key commodities and currencies at the week's end:

  • New York Spot Gold ended the week at $855.50; it closed at $964.60 on July 11. That's a decline of $109.10 (11.31%.)

  • Crude oil for future delivery finished at $115.20 per barrel on Friday. Crude hit a record high of $147.27 on July 11; that's a drop of $32.07 (21.776%.) You may have noticed cheaper gas at your favorite station already (I know I have.)

  • On Friday, the euro bought $1.5005 dollars. On July 11, the euro bought $1.5937 dollars. A dime doesn't seem like much but it's a big deal in the currency markets.

For the government's official report on consumer prices, stay tuned for the July Consumer Price Index (CPI) figures which will be released by the Labor Department on Thursday, August 14.

--

The futures market has odds at 78% that the Federal Open Market Committee (FOMC) will leave the benchmark Fed Funds Target Rate at its current level of 2.0% when the group meets on September 16TH, 2008. 22% in the market are betting that the Fed will raise short-term rates by at least 25 basis points (0.25 percentage point) on September 16TH.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 78% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark Federal Funds Target Rate at the current 2.0% at the September 16TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will remain at the current 5.0% after the September 16TH, 2008 FOMC monetary policy meeting: 78% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Friday, August 01, 2008

Futures Market 92% Certain Prime Rate Will Remain at 5.00% After August 5 Fed Meeting

The American workforce shrank by 51,000 jobs last month, according to the Labor Department's employment situation report released earlier today. The unemployment rate rose to 5.7%.

The American economy hasn't added jobs since last December.

With the whole nation complaining about rising prices, there's no question that more than a few economists within the Federal Reserve system would like to see the Federal Open Market Committee (FOMC) raise short-term rates when the group meets on August 5TH. However, with an economy that's still hemorrhaging jobs, it's very likely the Fed will opt to keep rates steady when they release their decision Tuesday afternoon.


The futures market has odds at 92% that the Federal Open Market Committee (FOMC) will leave the benchmark Fed Funds Target Rate at its current level of 2.0% when the group meets on August 5TH, 2008. 8% in the market are betting that the Fed will raise short-term rates by 25 basis points (0.25 percentage point) on August 5TH.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 92% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark Federal Funds Target Rate at the current 2.0% at the August 5TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will remain at the current 5.0% after the August 5TH, 2008 FOMC monetary policy meeting: 92% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Monday, July 14, 2008

Futures Market 90% Certain That The Fed Will Leave Short-Term Rates Alone on August 5

If you want to help this tepid U.S. economy, review your wish list and buy something. This is no commercial for the banking industry. Simple fact is, short-term rates, like the U.S. Prime Rate, won't go any lower this year, and may even go up within the next six months as the Fed may need to take action to keep inflation in check.

The futures market currently has odds at 90% that the Federal Open Market Committee (FOMC) will leave the benchmark Fed Funds Target Rate at its current level of 2.0% when the group meets on August 5TH, 2008. 10% in the market are betting that the Fed will raise short-term rates by 25 basis points (0.25 percentage point) on August 5TH.

Recent and notable developments in the economy:

  • The current bear market may spook consumers with stock portfolios and retirement plans to worry about. Since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) has now lost 3,109.34 points (21.952%), while the broader S&P 500 Index has given up 336.85 points (21.522%.)

  • Crude oil for future delivery is currently trading at $145.18 per barrel in New York. On July 13, 2007, the price on crude finished the week at $73.93 per barrel. That's an increase of $71.25 (96.375%.)

  • On July 13, 2007, the euro bought 1.3783 U.S. dollars in New York. Right now, the euro buys 1.5896 U.S. dollars.

  • On July 13, 2007, the yield on the 10-Year Treasury Note finished the week @ 5.107%. Today the yield closed at 3.88%.

  • On the positive side, the Institute for Supply Management reported that its Purchasing Manager's Index (PMI) advanced from 49.6 for May to 50.2% for June. Any figure above 50% suggests that, generally, the American manufacturing sector is expanding, while any figure below 50% suggests contraction. The PMI hasn't been above 50% since January 2008.

  • On June 24, 2008, The Conference Board reported that its Consumer Confidence Index (CCI) for June 2008 fell to 50.4. The CCI has been declining since December of last year:

    December 2007: 90.6
    January 2008: 87.3
    February 2008: 76.4
    March 2008: 65.9
    April 2008: 62.8
    May 2008: 58.1
    June 2008: 50.4 (preliminary)
    The CCI offers insight about how consumers are feeling about the U.S. economy and their own financial circumstances. The baseline "100" score is associated with 1985 survey data.

Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 90% (as implied by current pricing on contracts) that the FOMC will elect to leave the benchmark Federal Funds Target Rate at the current 2.0% at the August 5TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will remain at the current 5.0% after the August 5TH, 2008 FOMC monetary policy meeting: 90% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Thursday, May 22, 2008

Futures Market 92% Certain That The Fed Is Done with Cutting Rates for Now

If you've been waiting for just the right time to borrow money, then there is some great news for you today: it's likely that the Fed is done with the current cycle of rate cuts. This means that short-term interest rates, including the U.S. Prime Rate (currently at 5.0%), are not likely to go any lower this year. This is a great time to lock in a favorable rate on a non-mortgage loan, especially if the loan in question has a fixed interest rate (FYI: if it's a home loan you're after, mortgage rates are still looking good).

The futures market currently has odds at 92% that the Federal Open Market Committee (FOMC) will leave the benchmark Fed Funds Target Rate at its current level of 2.0% when the group meets on June 25TH, 2008. 8% in the market are betting that the Fed will cut short-term rates by 25 basis points (0.25 percentage point) on June 25TH.

Recent news that has influenced the futures market this week:

  • Speaking in New Orleans on May 20, Fed Vice Chairman Donald Kohn had this to say (clip):

    "...With the information now in hand, it is my judgment that monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term. But a large measure of uncertainty surrounds that judgment and as the economy evolves, so will the appropriate stance of policy..."

  • And here's a clip from the recently released minutes from the April 29-30 FOMC monetary policy meeting:

    "...In the Committee's discussion of monetary policy for the intermeeeting period, most members judged that policy should be eased by 25 basis points at this meeting. Although prospects for economic activity had not deteriorated significantly since the March meeting, the outlook for growth and employment remained weak and slack in resource utilization was likely to increase. An additional easing in policy would help to foster moderate growth over time without impeding a moderation in inflation. Moreover, although the likelihood that economic activity would be severely disrupted by a sharp deterioration in financial markets had apparently receded, most members thought that the risks to economic growth were still skewed to the downside. A reduction in interest rates would help to mitigate those risks. However, most members viewed the decision to reduce interest rates at this meeting as a close call..."

Of course, the incessant rise of crude oil prices isn't making the Fed's job any easier. Crude oil for future delivery is currently trading at a staggering $130.55 per barrel in New York, which is basically tantamount to throwing a big, wet towel over the U.S. economy, while at the same time stoking the flames of inflation. Yuck.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 92% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark Federal Funds Target Rate at the current 2.0% at the June 25TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will remain at the current 5.0% after the June 25TH, 2008 FOMC monetary policy meeting: 92% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Monday, April 28, 2008

Fed Likely to Cut Short-Term Rates by 25 Basis Points On Wednesday

The next Federal Open Market Committee (FOMC) monetary policy meeting is just 2 days away, and right now the fed funds futures market is pretty confident that the Fed will cut short-term rates by 25 basis points (0.25 percentage point) on Wednesday.

The futures market currently has odds at 80% that the Fed will cut the benchmark Fed Funds Target Rate by 25 basis points two days from now. 20% in the market are betting that the Fed will leave short-term rates at their current level when the next FOMC meeting adjourns on Wednesday.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 80% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the April 30TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the April 30TH FOMC monetary policy meeting: 80% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Wednesday, April 09, 2008

Fed Will Cut Short-Term Rates On April 30; Odds On 50 Basis Point Cut Rising

The fed funds futures market currently has odds at 60% that the Fed will cut the benchmark Fed Funds Target Rate by 25 basis points (0.25 percentage point) at the April 30TH FOMC monetary policy meeting. 40% are betting that the Fed will cut short-term rates by 50 basis points at the end of the month.

Recent economic news influencing the futures market:

  • The U.S. economy got weaker by 80,000 jobs last month, according to the Labor Department's most recent jobs report, while the unemployment rate rose from 4.8% to 5.1%. The total number of nonfarm payrolls lost since the beginning of 2008 now stands at 232,000.

  • Last Wednesday, the U.S. Census Bureau reported that factory orders declined by 1.3% during February 2008. Wall Street economists were expecting a decline of about 0.6%.

  • Last Tuesday, the Institute for Supply Management reported that the Purchasing Manager's Index (PMI) advanced from 48.3 for February to 48.6% for March. Though the recent figure indicates some improvement, any figure below 50% suggests that, generally, the American manufacturing sector is contracting.

  • Also last Tuesday, the U.S. Census Bureau reported that construction spending fell by 0.3% during February 2008. Wall Street economists were expecting a decline of about 1.1%. When comparing 02/2007 to 02/2008, construction spending was down by 3.5%.

  • In prepared remarks before the U.S. Senate Committee on Banking, Housing, and Urban Affairs last Thursday, Fed boss Ben Bernanke made the following comments:

    "...Although the situation has recently improved somewhat, financial markets remain under considerable stress. Pressures in short-term bank funding markets, which had abated somewhat beginning late last year, have increased once again. Many lenders have been reluctant to provide credit to counterparties, especially leveraged investors, and increased the amount of collateral they required to back short-term security financing agreements. To meet those demands, investors have reduced their leverage and liquidated holdings of securities, putting further downward pressure on security prices. Credit availability has also been restricted because some large financial institutions, including some commercial and investment banks and the government-sponsored enterprises (GSEs), have reported substantial losses and writedowns, reducing their capital available to support increased lending. Some key securitization markets, including those for nonconforming mortgages, continue to function poorly if at all.

    These developments in financial markets--which themselves reflect, in part, greater concerns about housing and the economic outlook more generally--have weighed on real economic activity. Notably, in the housing market, sales of both new and existing homes have generally continued weak, partly as a result of the reduced availability of mortgage credit, and home prices have continued to fall. Private payroll employment fell substantially in February, after two months of smaller job losses, with job cuts in construction and closely related industries accounting for a significant share of the decline. But the demand for labor has also moderated recently in other industries. Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. Inflation has also been a source of concern. We expect inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully..."

  • And here's a clip from Ben Bernanke's testimony before the Joint Economic Committee of the U.S. Congress last Wednesday:

    "...Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly. We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies; and growth is expected to proceed at or a little above its sustainable pace in 2009, bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions. However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside.

    Inflation has also been a source of concern. The price index for personal consumption expenditures rose 3.4 percent over the twelve months ending in February, up from 2.3 percent over the preceding twelve-month period. To a large extent, this pickup in inflation has been the result of sharp increases in the prices of crude oil, agricultural products, and other globally traded commodities. Additionally, the decline in the foreign exchange value of the dollar has boosted some non-commodity import prices and thus contributed to inflation. However, the so-called core rate of inflation--that is, inflation excluding food and energy prices--has edged down recently after firming somewhat late last year..."

Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the April 30TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the April 30TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Tuesday, March 25, 2008

Futures Market Certain The Fed Will Cut Rates Again on April 30

The Fed has cut short-term rates aggressively -- by 300 basis points (3.00 percentage points) since mid-September of last year -- in an attempt to inject vitality into the sluggish economy and help ease turmoil in credit markets. The Fed doesn't want to cut rates by too much, which could easily create another wave of asset bubbles in the future. According to current odds from the fed funds futures market, however, the Fed will cut again on April 30.

Recent economic news influencing the futures market:

  • Last Thursday, The Conference Board reported that the nation's leading economic indicators fell by 0.3% during February 2008, which is what Wall Street economists were expecting.

  • Also last Thursday, the Federal Reserve Bank of Philadelphia reported that its diffusion index of current manufacturing activity in the Philadelphia area (the Fed's Third District) came in at -17.4 for this month. Any figure below zero indicates that manufacturing in the Fed's Philadelphia region is contracting, while a positive figure implies expansion. The Fed's Third District includes all of Delaware, parts of southern New Jersey, and a large section of eastern Pennsylvania.

  • Yesterday, the National Association of Realtors® released its report on sales of previously owned homes for February. Though sales of previously occupied homes improved during February, the median and average price for a used home declined for the third straight month. According to preliminary estimates, the median price on a used home in the United States was $195,900, while the average price was $241,900.

  • Earlier today, The Conference Board reported that the Consumer Confidence Index (CCI) fell to 64.5 this month. Wall Street economists were expecting ~73.0. The CCI has been declining from month to month since last summer (the July 2007 figure was 111.9.) For the CCI, the baseline score of 100 is associated with 1985 survey results.

Right now, the fed funds futures market has odds at 66% that the Fed will cut the benchmark Fed Funds Target Rate by 25 basis points (0.25 percentage point) at the April 30TH FOMC monetary policy meeting. 34% are betting that the Fed will cut short-term rates by 50 basis points at the end of next month.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the April 30TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the April 30TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Monday, March 17, 2008

Fed Will Cut Short-Term Rates by At Least 100 Basis Points Tomorrow

Shares of the investment bank Bear Stearns fell 87% today to close at $4.81. The stock was at $145.49 on March 19, 2007. Though a rescue plan is in place for Bear (the company will likely be sold to JPMorgan Chase at a fire sale price), the Fed is still worried about the health of the financial sector. Confidence is evaporating fast, and the everyone is counting on the Fed to use its powers to help stabilize the system.

Credit markets need a serious boost, and the Fed will deliver. Yesterday, the FOMC lowered the discount rate by 25 basis points to 3.25%. In all likelihood, the FOMC will lower the Fed Funds Target Rate by at least 100 basis points tomorrow afternoon.

Right now, the fed funds futures market has odds at 84% that the Fed will cut the benchmark Fed Funds Target Rate by 100 basis points (1.00 percentage point) at the March 18TH FOMC monetary policy meeting. 16% are betting that the Fed will cut short-term rates by 125 basis points tomorrow.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 100 basis points (1.00 percentage point) at the March 18TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 100 basis points at the March 18TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Saturday, March 15, 2008

Short-Term Rates Very Likely to be Cut By At Least 75 Basis Points On Tuesday

With all the somber economic news in the business headlines lately, one thing is clear: the Fed wants to cut rates aggressively when the Federal Open Market Committee (FOMC) meets on March 18 (Tuesday.)

However, cutting short-term rates aggressively with the concurrent problem of rising prices could hurt the FOMC's credibility. For sure, no one wants a return of 1970's-style inflation.

How bad is inflation right now? Well, to get an idea: crude oil for future delivery finished the week at a staggering $110.21 per barrel, while New York Spot Gold ended the week at $1,002.50 per ounce.

The fed funds futures market is now indicating that the Fed may cut short-term rates by as much as 100 basis points (1.00 percentage point) on March 18. That's very, very aggressive. Is the Fed really going to execute such a large rate cut when so many prominent economists are worried about inflation? Yes, it is.

The Fed is very likely to cut by at least 75 basis points on Tuesday. The twofold justification for such a large cut came on Friday:

  • For some time, the FOMC has stated that it "expects inflation to moderate in coming quarters." The February 2008 Consumer Price Index (CPI) figures bear out the group's assertion. According to the Labor Department report, both the CPI and the core CPI advanced by less than 0.1% on a seasonally-adjusted basis last month. Bottom line: the CPI figures for February are, in essence, the Fed's license to cut aggressively on Tuesday.

  • The U.S. #5 investment bank Bear Stearns is strapped for cash. Bear Stearns stock price fell 47.37% on Friday to close @ $30.00 per share. A year ago, the stock was trading at $143.68. JPMorgan Chase bank borrowed money directly from the Federal Reserve via the Fed's discount window, and then lent that same cash to Bear. The Fed is assuming all the risk for this loan. Bear Stearns may be sold in the near future.

Is the U.S. economy already in recession? We'll have to wait until April 30 for the answer. That's when the Commerce Department is set to release the "advance" Gross Domestic Product (GDP) report for Q1, 2008.


Yesterday, the fed funds futures market had odds at 60% that the Fed will cut the benchmark Fed Funds Target Rate by 100 basis points (1.00 percentage point) at the March 18TH FOMC monetary policy meeting. 40% are betting that the Fed will cut short-term rates by 75 basis points on March 18TH.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 75 basis points (0.75 percentage point) at the March 18TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 75 basis points at the March 18TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Monday, March 10, 2008

Odds On A 75 Basis Point Rate Cut for March 18 Hit 96% On Weak Jobs Report

Thanks to a surprisingly anemic jobs report, and other economic news suggesting that a recession may be in the offing, the fed funds futures market is now 100% certain that the Fed will cut short-term rates by at least 75 basis points (0.75 percentage point) this month.

  • On Friday, the Labor Department reported that nonfarm payrolls declined by 63,000 during February 2008. Wall Street economists were expecting payrolls to advance by about 25,000. What's worse, the nonfarm payrolls figure for January was revised down from a loss of 17,000 jobs to a loss of 22,000. The latest employment figures have led many economists to believe that the U.S. economy is already in a recession.

  • The stock market recoiled in response to the February jobs report. Since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) is now 2,270.84 points (16.032%) lower, while the S&P 500 Index has shed 271.78 points (17.364%.)

  • The prospect of an imminent and aggressive rate cut from the Fed has precipitated a further weakening of the dollar and has helped to send crude oil prices to record highs. By Friday evening, one euro could be traded for $1.5356 in New York, while one dollar bought 0.6512 euro. The price on crude oil for future delivery closed at $105.15 per barrel.

  • On Monday, the Institute for Supply Management reported that the Purchasing Manager's Index (PMI) fell from 50.7% for January to 48.3% for February. Any figure above 50% suggests that, generally, U.S. manufacturing is expanding, while any figure below 50% suggests that the American manufacturing sector is contracting.

  • On Friday, the Federal Reserve announced that it will expand its Term Auction Facility (TAF) in a continuing effort to keep financial markets from seizing up.

As of right now, the fed funds futures market has odds at 96% that the Fed will cut the benchmark Fed Funds Target Rate by 75 basis points (0.75 percentage point) at or before the March 18TH Federal Open Market Committee (FOMC) monetary policy meeting. A 4% minority in the futures market are betting that the Fed will cut short-term rates by 100 basis points at some point between now and March 18TH.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 75 basis points (0.75 percentage point) at or before the March 18TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 75 basis points at or before the March 18TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Thursday, February 28, 2008

Futures Market Certain of 50 Basis Point Cut Despite Rising Prices

Two days ago, the Labor Department reported that wholesale prices rose by a very ugly 1.0% during January 2008. Consumer prices rose by 0.4% during the same month. Crude oil for future delivery is currently trading at $102.24 per barrel (no, that's not a typo), while New York Spot Gold finished the day at $969.50 per ounce. With inflation stealing current economic news headlines, how is it that the fed funds futures market is once again 100% certain that the Fed will cut short-term rates by at least 50 basis points (0.50 percentage point) by March 18?

Here's what Fed boss Ben Bernanke had to say about it in testimony before Congress yesterday:

"...The economic situation has become distinctly less favorable since the time of our July report. Strains in financial markets, which first became evident late last summer, have persisted; and pressures on bank capital and the continued poor functioning of markets for securitized credit have led to tighter credit conditions for many households and businesses. The growth of real gross domestic product (GDP) held up well through the third quarter despite the financial turmoil, but it has since slowed sharply. Labor market conditions have similarly softened, as job creation has slowed and the unemployment rate--at 4.9 percent in January--has moved up somewhat.

Many of the challenges now facing our economy stem from the continuing contraction of the U.S. housing market. In 2006, after a multiyear boom in residential construction and house prices, the housing market reversed course. Housing starts and sales of new homes are now less than half of their respective peaks, and house prices have flattened or declined in most areas. Changes in the availability of mortgage credit amplified the swings in the housing market. During the housing sector's expansion phase, increasingly lax lending standards, particularly in the subprime market, raised the effective demand for housing, pushing up prices and stimulating construction activity. As the housing market began to turn down, however, the slump in subprime mortgage originations, together with a more general tightening of credit conditions, has served to increase the severity of the downturn. Weaker house prices in turn have contributed to the deterioration in the performance of mortgage-related securities and reduced the availability of mortgage credit.

The housing market is expected to continue to weigh on economic activity in coming quarters. Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries...

...The rate of inflation that is actually realized will of course depend on a variety of factors. Inflation could be lower than we anticipate if slower-than-expected global growth moderates the pressure on the prices of energy and other commodities or if rates of domestic resource utilization fall more than we currently expect. Upside risks to the inflation projection are also present, however, including the possibilities that energy and food prices do not flatten out or that the pass-through to core prices from higher commodity prices and from the weaker dollar may be greater than we anticipate. Indeed, the further increases in the prices of energy and other commodities in recent weeks, together with the latest data on consumer prices, suggest slightly greater upside risks to the projections of both overall and core inflation than we saw last month. Should high rates of overall inflation persist, the possibility also exists that inflation expectations could become less well anchored. Any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and could reduce the flexibility of the FOMC to counter shortfalls in growth in the future. Accordingly, in the months ahead, the Federal Reserve will continue to monitor closely inflation and inflation expectations..."

Other economic news supporting predictions that the Fed will cut aggressively next month:

  • Housing: On Monday, the National Association of Realtors® reported that sales of previously occupied homes fell by 0.4% last month. Between 01/2007 and 01/2008, sales of used homes were down 23.4%. And according to preliminary estimates, the median cost of a used home fell to $201,100, while the average price sank to $247,700.

  • Housing: On Wednesday, the Commerce Department reported that sales of newly built (virgin) homes fell by 2.8% last month. Between 01/2007 and 01/2008, sales of new homes were down 33.9%. According to preliminary estimates, the median price of a brand new home declined to $216,000.

  • Consumer Spending: On Tuesday, The Conference Board reported that the Consumer Confidence Index (CCI) fell to 75.0 for this month (February.) Wall Street economists were expecting the figure to come in at around 81.3. The CCI has been declining since the summer of 2007 (the 07/07 figure was 111.9.) For the CCI, the baseline score of 100 is associated with 1985 survey results.

  • Manufacturing: Yesterday, the Commerce Department reported the orders for durable goods fell by 5.3% last month. Wall Street was expecting a decline of about 3.5%. Durable goods = items built to last 3 years or more, like airplanes, cars and cooking ranges.


As of right now, the fed funds futures market has odds at 62% that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) at or before the March 18TH Federal Open Market Committee (FOMC) monetary policy meeting. A 38% minority in the futures market are betting that the Fed will cut short-term rates by 75 basis points at some point between now and March 18TH.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 50 basis points (0.50 percentage point) at or before the March 18TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 50 basis points at or before the March 18TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Friday, February 22, 2008

Odds On A 50 Basis Point Cut for Short-Term Rates Now at 96%

Currently, the fed funds futures market is nearly certain the Fed will cut short-term rates by 50 basis points (0.50 percentage point) on or before March 18, despite economic news this week that has many economists concerned about rising prices:

  • On Wednesday, the Labor Department released the Consumer Price Index (CPI) figures for January 2008. Consumer prices rose by 0.4% last month, while Wall Street economists were expecting an increase of 0.3%. From January 2007 through January 2008, the CPI increased by 4.3%: not a healthy figure.

  • The price on crude oil for future delivery closed at $98.81 today; crude topped $100 per barrel earlier this week. The price on New York Spot Gold closed at $944.60 earlier this afternoon.

On the flip side, contributing to the likelihood the Fed will cut by 50 instead of 25, the Federal Reserve Bank of Philadelphia reported yesterday that its diffusion index of current manufacturing activity in the Philadelphia area (the Fed's Third District) fell from -20.9 for January to -24.0 for this month. Any figure below zero indicates that manufacturing in the Fed's Philadelphia region is contracting, while a positive figure implies expansion. The Fed's Third District includes all of Delaware, parts of southern New Jersey, and a large section of eastern Pennsylvania.

As of right now, the fed funds futures market has odds at 96% that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) at or before the March 18TH Federal Open Market Committee (FOMC) monetary policy meeting. A 4% minority in the futures market are betting that the Fed will cut short-term rates by only 25 basis points at some point between now and March 18TH.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at or before the March 18TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at or before the March 18TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Thursday, February 14, 2008

Futures Market Still Certain Fed Will Cut Short-Term Rates by At Least 50 Basis Points

In prepared testimony made before the U.S. Senate Committee on Banking, Housing, and Urban Affairs earlier today, Fed boss Ben Bernanke made it pretty clear that the Fed will be cutting short-term rates in the near future -- no surprise really. Here's a clip:

"...A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives of maximum employment and price stability and, in particular, whether the policy actions taken thus far are having their intended effects. Monetary policy works with a lag. Therefore, our policy stance must be determined in light of the medium-term forecast for real activity and inflation, as well as the risks to that forecast. At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt. At the same time, overall consumer price inflation should moderate from its recent rates, and the public's longer-term inflation expectations should remain reasonably well anchored.

Although the baseline outlook envisions an improving picture, it is important to recognize that downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or that credit conditions may tighten substantially further. The FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks."

As of right now, the fed funds futures market has odds at 74% that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) at or before the March 18 Federal Open Market Committee (FOMC) monetary policy meeting. A 26% minority in the futures market are betting that the Fed will cut short-term rates by 75 basis points at some point between now and March 18.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 50 basis points (0.50 percentage point) at or before the March 18TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 50 basis points at or before the March 18TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Thursday, February 07, 2008

Futures Market Certain of A 50 Basis Point Cut On or Before March 18

Recession fears intensified Tuesday after investors had a chance to digest the numbers from the Institute for Supply Management's Business Activity Index. The index nosedived last month, from 54.4% for December to 41.9% for January. The scale of the decline was punctuated by the fact that any figure below 50% suggests that non-manufacturing sectors of the U.S. economy are contracting.

The Business Activity Index has been shrinking since the summer of last year, but only recently declined precipitously:

  • August 2007: 56.3%
  • September 2007: 55.7%
  • October 2007: 55.5%
  • November 2007: 54.6%
  • December 2007: 54.4%
  • January 2008: 41.9%

Here's a clip from the January report:

"...The industries reporting growth of business activity in January are: Utilities and Educational Services. The industries reporting decreased business activity in January are: Arts, Entertainment & Recreation; Agriculture, Forestry, Fishing & Hunting; Accommodation & Food Services; Health Care & Social Assistance; Transportation & Warehousing; Real Estate, Rental & Leasing; Management of Companies and Support Services; Construction; Wholesale Trade; Finance & Insurance; Information; Retail Trade; Public Administration; and Professional, Scientific & Technical Services..."

As of this evening, the fed funds futures market has odds at 80% that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) at or before the March 18 Federal Open Market Committee (FOMC) monetary policy meeting. A 20% minority in the futures market are betting that the Fed will cut short-term rates by 75 basis points between now and March 18.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 50 basis points (0.50 percentage point) at or before the March 18TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 50 basis points at or before the March 18TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Wednesday, January 30, 2008

U.S. Prime Rate Is Now 6.00%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its first, regularly scheduled monetary policy meeting of 2008, and, in accordance with the latest forecast, the FOMC has just lowered its target for the Federal Funds Rate by 50 basis points (0.50 percentage point) to 3.00%. Therefore, as of today, the U.S. Prime Rate is now 6.00%. Many American banks have already issued a press release announcing that their prime lending rate has been lowered from 6.50% to 6.00%.

Here's a clip from a press release issued by the FOMC earlier today:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco."

Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 67% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the March 18TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by 25 basis points at the March 18TH FOMC monetary policy meeting: 67% (more likely than unlikely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Fed Decision Imminent: Odds On A 50 Basis Point Cut at 74%

The economy grew by 0.6% during the fourth quarter of 2007, according to the "advance" estimate released by the Commerce Department this morning. Wall Street economists were expecting around 1.2%. 0.6% growth is certainly slow enough for the Fed to cut aggressively, as expected. The odds that the Fed will cut short-term rates by 50 basis points (0.50 percentage point) are currently at 74%, while odds on a 25 basis point cut are at 26%.

The decision on interest rates will be released in less than one hour. Stay tuned.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) today.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points today: 100% (certain)

  • Current odds that the Prime Rate will be cut by 50 basis points today: 74% (more likely than unlikely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

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Tuesday, January 29, 2008

Odds on The Fed Cutting by 50 Basis Points Tomorrow at 76% Despite Encouraging Report on Orders for Durable Goods

Some positive news from the economic front today: the Commerce Department reported that new orders for durable, manufactured goods -- products built to last 3 years or more, like DVD players, war planes and cooking ranges -- rose by $11.2 billion (5.2%) during December 2007. Wall Street economists were expecting an increase of about 1.6%. Despite this positive economic news, the fed funds futures market is still 76% certain that the Fed will opt for a 50 basis point (0.50 percentage point) cut for short-term rates tomorrow. The odds on a 25 basis point cut are currently at 24%.

On the negative side, earlier today the Conference Board reported that the Consumer Confidence Index (CCI) fell from last month's 90.6 to 87.9 for this month; discouraging news from a consumer spending perspective. Here are the CCI figures since the summer of last year:

  • July 2007: 111.9
  • August 2007: 105.6
  • September 2007: 99.5
  • October 2007: 95.2
  • November 2007: 87.8
  • December 2007: 90.6
  • January 2008: 87.9 (preliminary)

For the CCI, the baseline score of 100 is pegged to 1985 survey results.

Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at tomorrow's monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at tomorrow's FOMC monetary policy meeting: 100% (certain)

  • Current odds that the Prime Rate will be cut by 50 basis points at tomorrow's FOMC monetary policy meeting: 76% (more likely than unlikely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Sunday, January 27, 2008

Odds On A 50 Basis Point Cut for January 30 Now at 78%

The Fed will make its next decision on short-term interest rates on January 30, and as we approach that date, the odds from the fed funds futures market have, with increasing confidence, been predicting that the Fed will opt for a 50 basis point (0.50 percentage point) cut. The odds on a 50 basis point cut for the benchmark Fed Funds Target Rate now stand at 78%, and the remaining odds -- 22% -- are for a 25 basis point cut.

Let's have a quick look at what might have influenced the futures market recently.

Though both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index advanced on the week, both indexes are still down significantly since each peaked last fall. Since closing with all-time highs on October 9, 2007, the DJIA is now down 1,957.36 points (13.819%), while the S&P 500 is down 234.54 points (14.985%).

The yield on the benchmark 10-Year Treasury Note fell to 3.584%. For some perspective, the yield was 4.65% on October 9, 2007.

Also notable: New York Spot Gold closed at $910.50 per ounce on Friday.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the January 30TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the January 30TH FOMC monetary policy meeting: 100% (certain)

  • Current odds that the Prime Rate will be cut by 50 basis points at the January 30TH FOMC monetary policy meeting: 78% (more likely than unlikely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Thursday, January 24, 2008

Futures Market Still Certain Of Rate Cut for January 30; Odds On A 50 Basis Point Cut Now at 68%

Last Saturday, while most Wall Street economists were predicting that the Fed would cut rates by 50 basis points by January 30, the fed funds futures market was 72% certain that the Fed would cut by 75 basis points at or before the January 30 Federal Open Market Committee (FOMC) meeting. On Tuesday, we learned that the futures market had indeed nailed it, as usual. The Fed executed an intermeeting rate cut of 75 basis points, prompted by significant market losses in Asia and Europe on the Martin Luther King holiday.

The stock market has been looking healthier since Tuesday. The Dow Jones Industrial Average (DJIA) gained 108.44 points today, while the S&P 500 advanced by 13.47. Another positive piece of news: crude oil for future delivery is currently trading at $89.61 per barrel (crude closed at $97.91 on January 4, 2008.)

On the negative side, New York Spot Gold closed at $912.30 per ounce today, and the yield on the 10-Year Treasury Note closed at 3.64%. In other words: money is still moving to safe havens.

The news that has almost certainly been influencing the fed funds futures market the most today came from the housing sector. Earlier today, the National Association of Realtors® reported that sales of previously occupied homes fell by 2.2% last month, and sales were down by 22% from December '06 to December '07. The median price for a preowned home fell to $208,400, while the average price fell to $254.900 (preliminary data.) In the Northeast United States, the median price on a used home was down 8.9% for the December '06 to December '07 period.

The fed funds futures market is still 100% certain that the Fed will cut short-term rates by at least 25 basis points (0.25 percentage point) when the FOMC meets on January 30. As of right now, the market has odds at 68% that the Fed will cut short-term rates by 50 basis points, and current odds are at 32% that the Fed will opt instead for a 25 basis point cut on January 30.

Here's what these odds mean to all you hard working consumers out there: You can expect any loan that's tied to the WSJ Prime Rate (home equity lines of credit, variable-rate credit cards, business loans, personal loans, etc.) to be 1.00 percentage point lower by March (or April at the latest.) So if you have a variable-rate credit card that's indexed to Prime, and your current APR is 12%, you can look forward to your rate dropping to 11% within the next 2 months.

For those of you with a mortgage indexed to LIBOR, another Fed rate cut at the end of this month is great news for you too, because the LIBOR rates tend to move in tandem with the benchmark Fed Funds Target Rate.

If you've been patiently waiting for just the right time to borrow, then you may want to wait a little while longer. The current cycle of Fed rate cuts may continue after January. Stay tuned for the latest odds.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the January 30TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the January 30TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Tuesday, January 22, 2008

U.S. Prime Rate Is Now 6.50%

Earlier today, the Federal Open Market Committee (FOMC) of the Federal Reserve adjourned an emergency monetary policy meeting, and, in accordance with the latest forecast, the FOMC has just lowered its target for the Federal Funds Rate by 75 basis points (0.75 percentage point) to 3.50%. Therefore, as of today, the U.S. Prime Rate is now 6.50%. Many American banks have already issued a press release announcing that their prime lending rate has been lowered from 7.25% to 6.50%.

Here's a clip from a press release issued by the FOMC earlier today:

"The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.

In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis."

Despite today's intermeeting move by the Fed, the futures market is 100% certain that the Fed will cut short-term rates again on January 30TH.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the January 30TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the January 30TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Saturday, January 19, 2008

Odds That The Fed Will Cut Short-Term Rates by 75 Basis Points Now at 72%

Despite a significant rise for the Consumer Sentiment Index this month -- from 75.5 for December to 80.5 for January -- investors pulled more money out of stocks and into safer investments like U.S. Treasuries. Since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) has now lost 2,065.23 points (14.58%), while the S&P 500 has lost 239.96 points (15.331%). Yikes! On Friday, the yield on the 10-Year Treasury Note fell to 3.648%.

Last week, I remarked at how intense the odds from the fed funds futures market were looking. This week, the odds are still pretty intense. No one is betting that the Fed will cut rates by a wimpy 25 basis points (0.25 percentage point) by January 30 anymore. The future market now sees a 72% chance that the Fed will cut the benchmark Fed Funds Target Rate by 75 basis points (0.75 percentage point) by January 30TH. In other words, the futures market believes, with 100% certainty, that the Fed will cut short-term rates by at least 50 basis points by the end of the month, with odds at 28% that we will get a cut of no more than 50 basis points by January 30TH.

What do these odds mean in real world terms? Well, if you have a variable-rate credit card that's indexed to the WSJ Prime Rate, then chances are your APR will be 0.50 percentage point lower by the time January 31 arrives. This is true for any loan or credit product that's tied to the U.S. Prime Rate. For some consumers, it may take a month or so for your bank to implement the rate change, but it's something you can look forward to.


Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 50 basis points (0.50 percentage point) at the January 30TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 50 basis points at the January 30TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Saturday, January 12, 2008

Futures Market Now Certain The Fed Will Cut Rates By 50 Basis Points On January 30

There was good news from the distressed financial sector this week: Bank of America is buying mortgage-origination behemoth Countrywide Financial. Countrywide, which is the nation's #1 home-loan lender, has taken a beating in the wake of the subprime mortgage crisis, and there were rumors that the company might file for bankruptcy.

But the good news about Countrywide wasn't enough to keep the stock market from losing ground this week. In fact, since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) has lost 1,558.23 points (11.0%), while the S&P 500 has given up 164.13 points (10.487%). On Friday, New York Spot Gold crept closer to the $900 mark, and the yield on the 10-year treasury note fell to 3.81%.

Right now, the fed funds futures market thinks the economy is looking bad enough that the Fed will take aggressive action when the Federal Open Market Committee (FOMC) releases its decision on interest rates on January 30. The odds that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) are currently at a very confident 100%; the market is also betting, at 34% odds, that the Fed will either cut rates before the January 30 meeting, or they will opt for a 75 basis point cut at the end of the month. Those are some pretty intense odds.


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 50 basis points (0.50 percentage point) at the January 30TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 50 basis points at the January 30TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Thursday, January 10, 2008

Odds On A 50 Basis Point Cut for January 30 Hit 90% On Bernanke Comments

The implied odds that the Fed will opt for an aggressive 50 basis point (0.50 percentage point) cut on January 30 jumped to 90% after the fed funds futures market had a chance to digest comments made by Fed boss Ben Bernanke this morning. Here's a clip from Bernanke's speech at the Women in Housing and Finance / Exchequer Club Joint Luncheon in Washington, D.C.:

"...Monetary policy has responded proactively to evolving conditions. As you know, the Committee cut its target for the federal funds rate by 50 basis points at its September meeting and by 25 basis points each at the October and December meetings. In total, therefore, we have brought the funds rate down by a percentage point from its level just before financial strains emerged. The Federal Reserve took these actions to help offset the restraint imposed by the tightening of credit conditions and the weakening of the housing market. However, in light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary. The Committee will, of course, be carefully evaluating incoming information bearing on the economic outlook. Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks..."

The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the January 30TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the January 30TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Friday, January 04, 2008

A 50 Basis Point Cut Is Now More Likely Than A Quarter-Point Cut for January 30

help wantedNonfarm payrolls advanced by 18,000 during December 2007, according to this morning's Labor Department report. Wall Street economists were expecting around 70,000 new jobs for last month. News that the unemployment rate jumped from 4.7% to 5.0% also surprised economists, many of whom were expecting the jobless rate to come in at 4.8%.

The investors who trade in fed funds futures reacted to today's employment report by raising bets that the Fed will opt for an aggressive cut on January 30. The futures market is still 100% certain that the Fed will lower the benchmark fed funds target rate at the end of the month; the odds on a 50 basis point (0.50 percentage point) cut are now at 68%, and the odds on a 25 basis point cut are currently at 32%.

Wall Street reacted bearishly to today's jobs report: the Dow Jones Industrial Average (DJIA) fell by 256.54 points (1.96%), the NASDAQ Composite lost 98.03 points (3.77%) and the S&P 500 declined by 35.53 points (2.46%). The yield on the 10-year treasury note fell to 3.854% and New York Spot Gold closed at $863.00 per ounce.


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the January 30TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the January 30TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Wednesday, January 02, 2008

Odds On A Rate Cut for the January 30 Monetary Policy Meeting Now at 100%

The odds that the Fed will cut short-term rates on January 30TH hit 100% today on discouraging news related to U.S. manufacturing, and the release of minutes from the December 11TH Federal Open Market Committee (FOMC) meeting. In fact, the implied odds that the Fed will opt for an aggressive 50 basis point (0.50 percentage point) cut are now at 24%, with odds of a 25 basis point cut at 76%.

Influencing the futures market today:

  • The Institute for Supply Management's Purchasing Manager's Index (PMI) for December came in at 47.7%. With the PMI, any figure above 50% suggests that the U.S. manufacturing is expanding, while any figure below 50% suggests that manufacturing is contracting. Wall Street economists were expecting around 50.9% for December. The PMI has been falling since June of 2007. This news adds credence to the notion that a recession may be in the offing.

  • Earlier this afternoon, the FOMC released the minutes from it's December 11TH monetary policy meeting. Here's a clip:

    "...Participants noted the marked deceleration in consumer spending in the national data. Real personal consumption expenditures had shown essentially no growth in September and October, suggesting that tighter credit conditions, higher gasoline prices, and the continuing housing correction might be restraining growth in real consumer spending. Retailers reported weaker results in many regions of the country, but in some, retailers saw solid growth. Job growth rebounded somewhat in October and November, and participants expected continuing gains in employment and income to support rising consumer spending, though they anticipated slower growth of jobs, income, and spending than in recent years. However, consumer confidence recently had dropped by a sizable amount, leading some participants to voice concerns that household spending might increase less than currently anticipated.

    Recent data and anecdotal information indicated that the housing sector was weaker than participants had expected at the time of the Committee’s previous meeting. In light of elevated inventories of unsold homes and the higher cost and reduced availability of nonconforming mortgage loans, participants agreed that the housing correction was likely to be both deeper and more prolonged than they had anticipated in October. Moreover, rising foreclosures and the resulting increase in the supply of homes for sale could put additional downward pressure on prices, leading to a greater decline in household wealth and potentially to further disruptions in the financial markets..."

The prospect of another rate cut by the Fed sent the price of gold and crude oil higher today: crude for future delivery is currently trading at $99.60 per barrel, with New York Spot Gold at $858.20 per ounce.


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the January 30TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the January 30TH FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Friday, January 4, 2008: The Labor Department releases the December Employment Situation Report.

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Monday, December 31, 2007

Odds On A Rate Cut for the January 30 Monetary Policy Meeting Now at 94%

A mixed report on existing home sales caused the odds on a rate cut for next month to jump to 94% today. According to the National Association of Realtors®, sales of previously occupied homes enjoyed a 0.4% increase last month. This positive news was, however, tempered by comparisons to years past. Between November '06 and November '07, sales of preowned homes were down 20%, while the median price fell by 3.3%. Here's a sampling of the median cost of a preowned home since November, 2005:

  • November 2005: $225,000

  • November 2006: $217,300

  • November 2007: $210,200 (preliminary data)

Nationwide, the inventory of preowned homes for sale fell from 4,433,000 to 4,273,000 units at the end of last month, which should help to stem the decline in prices.

Click here for historical prices and a chart.


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 94% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will elect to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the January 30TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.0% at the January 30TH FOMC monetary policy meeting: 94% (very likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Friday, January 4, 2008: The Labor Department releases the December Employment Situation Report.

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Saturday, December 29, 2007

Odds On A Rate Cut for the January 30 Monetary Policy Meeting Now at 90%

The odds that the Fed will cut short-term interest rates next month jumped to 90% on Friday, after news of dismal November new home sales. According to the Commerce Department, new home sales fell by 9.0% last month. Furthermore, the modest advance of new home sales during September and October were revised downward. Between November '06 and November '07, sales of new homes declined by 34.4%.

Nationwide, the median price of a shiny new home was $239,100 during November, while the average price was $293,300. The number of new homes for sale at the end of last month fell from 519,000 to 509,000.

The cost of a newly built home peaked back in March of this year, when the median price was $262,600, and the average was $329,400 (click here for historical prices.)


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 90% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the January 30TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.0% at the January 30TH FOMC monetary policy meeting: 90% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Friday, January 4, 2008: The Labor Department releases the December Employment Situation Report.

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Wednesday, December 26, 2007

Odds On A Rate Cut for the January 30 Monetary Policy Meeting Now at 76%

The Federal Reserve has been auctioning off big bundles of money to U.S. financial institutions in recent weeks, and news that the Fed will continue using its Term Auction Facility (TAF) to pump money into the banking system has caused the odds on a rate cut for next month to decline. The fed funds futures market, however, is still betting that the Fed will opt to lower short-term interest rates again on January 30.

The odds on a cut for the benchmark Fed Funds Target Rate at the next Federal Open Market Committee (FOMC) meeting are now at 76%. Influencing the futures market last week:

  • On Wednesday, the U.S. Energy Information Administration (EIA) reported that crude oil inventories dropped by 7.6 million barrels during the week that ended on December 14. This puts upward pressure on prices at a time when Americans living in cooler climes are buying heating oil, and the Fed is already worried about rising prices.

  • On Thursday, the Federal Reserve Bank of Philadelphia released its index of manufacturing conditions within the Fed's Third District. For December, the index came in at -5.7, while economists were expecting around +6.2. Any figure below zero indicates that manufacturing in the Fed's Philadelphia region is contracting, while a positive figure implies expansion. The Fed's Third District includes all of Delaware, parts of southern New Jersey, and a large portion of eastern Pennsylvania.

  • The New York-based Conference Board released its report on the nation's leading economic indicators on Thursday. For November, leading indicators declined by 0.4%, while economists were expecting a decline of about 0.3%.

  • The University of Michigan's Consumer Sentiment Index has been declining since September of this year. For December, the index came in at 75.5; the index was at 83.4 for September. Somber news from a consumer spending perspective. The baseline score of 100 is pegged to U.S. consumer sentiment during 1966.

  • Then again, American consumers may keep on spending regardless of their concerns about the economy. According to the Commerce Department, consumer spending rose by 1.1% during November, the biggest increase in over three years. Great news for the U.S. and global economies, but increased spending also means upwards pressure on prices, and the Fed doesn't want to be forced into raising rates right after completing a rate-cut cycle.

The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 76% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the January 30TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.0% at the January 30TH FOMC monetary policy meeting: 76% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Friday, December 14, 2007

Odds On A Rate Cut for the January 30 Monetary Policy Meeting Now at 78%

On Wednesday, a day after the Fed cut short-term rates by 25 basis points, the fed funds futures market was certain that the Fed will cut short-term rates again at the next monetary policy meeting on January 30, 2008. As of right now, however, the odds on another cut for next month have dropped to 78%, thanks to a couple of gloomy reports on inflation.

On Thursday, the Labor Department reported that wholesale prices increased by 3.2% last month; Wall Street economists were expecting a rise of 1.6%. Ouch!

Earlier today, the Labor Department's report on consumer prices was released: the Consumer Prices Index (CPI) rose by a seasonally adjusted rate of 0.8% last month; core CPI, the Fed's preferred gauge, rose by 0.3%. The CPI has experienced a 4.3% increase since November, 2006.

With crude oil prices resuming their march back up toward the $100 per barrel mark, and with many economists predicting that the Fed will cut the Fed Funds Target Rate again next month, some are starting to talk seriously about the possibility of stagflation. Yikes!


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 78% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the January 30TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.0% at the January 30TH FOMC monetary policy meeting: 78% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Friday, December 07, 2007

A 25 Basis Point Rate Cut Is Currently The Most Likely Outcome for the December 11 FOMC Meeting

The Labor Department released the November jobs figures today, along with revised jobs numbers from October and September. According to the report, 94,000 new, non-farm payrolls were added to the American workforce last month. Not great, but not that bad either. October non-farm payrolls were revised up from 166,000 to 170,000, while September was revised down from 96,000 to 44,000. The unemployment rate held steady at 4.7% for the third-straight month.

The investors who trade in fed funds futures are still 100% certain that the Fed will cut the benchmark Fed Funds Target Rate on Tuesday; today's employment news caused the odds on a 50 basis point (0.50 percentage point) cut to drop to 24%, with the odds on a 25 basis point (0.25 percentage point) cut now at 76%.


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (according to current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the December 11TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the December 11TH, 2007 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Monday, December 03, 2007

Odds On A 50 Basis Point Cut for December 11 Are Rising

According to current pricing on contracts, the fed funds futures market is still 100% certain that a rate cut is coming on December 11, and is now suggesting that the odds on a 50 basis point (0.50 percentage point) cut are now 40%, with the odds on a 25 basis point (0.25 percentage point) cut at 60%.

Odds experience a significant shift today after the Institute for Supply Management released the Purchasing Manager's Index (PMI) report for November. With the PMI, any figure above 50% suggests that U.S. manufacturing is expanding, while any figure below 50% suggests that manufacturing is contracting. The November PMI came in at 50.8%.

The PMI is a key economic report because American manufacturing generates around $1.6 trillion, or approximately 12% of U.S. gross domestic product (GDP).

Even though today's PMI report indicates that American manufacturing was expanding last month, the odds that the Fed will opt for an aggressive, 50 basis point cut increased, because the PMI has been declining since the end of the second quarter. Here are the PMI numbers since June of this year:

  • June: 56.0%
  • July: 53.8%
  • August: 52.9%
  • September: 52.0%
  • October: 50.9%
  • November: 50.8%
The trend is quite clear.


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the December 11TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the December 11TH, 2007 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Friday, December 7, 2007: The Labor Department releases the November Employment Situation Report.

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Friday, November 30, 2007

Futures Market Now Certain That The Fed Will Cut Rates On December 11

According to the fed funds futures market, it's no longer a matter of if the Fed will cut, but by how much. The big question now is: will the Fed lower short-term rates by 25 basis points on December 11, or will it opt for an aggressive 50 basis point cut?

The fed funds futures market currently has odds on a rate cut at 100%, with 66% betting on a 25 basis point (0.25 percentage point) cut, and 34% betting that the Fed will cut short term rates by 50 basis points (0.50 percentage point.)

Influencing the futures market this week were more signs that the economy is slowing, and remarks made by high-ranking Fed officials about the still-worrisome state of U.S. credit markets. Here are some of the highlights:

  • Credit market conditions are still quite bad. Fed boss Ben Bernanke made the following comments in a recent speech:

    ...Investors have focused on continued credit losses and write-downs across a number of financial institutions, prompted in many cases by credit-rating agencies’ downgrades of securities backed by residential mortgages. The fresh wave of investor concern has contributed in recent weeks to a decline in equity values, a widening of risk spreads for many credit products (not only those related to housing), and increased short-term funding pressures. These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors. Needless to say, the Federal Reserve is following the evolution of financial conditions carefully, with particular attention to the question of how strains in financial markets might affect the broader economy...
  • Home prices continue to decline, while inventories remain high. According to data compiled by the National Association of Realtors®, the median and average cost of a preowned (used) home declined from month to month since June of this year. Preliminary data indicate that last month, the median cost for a preowned home was $207,800, while the average cost was estimated at $255,500.

    Also, according to preliminary estimates released by the Commerce Department yesterday, the median cost of a brand-new home fell to $217,800; not since the fall of 2004 has the median price for a newly-built home been so low.

  • Orders for durable goods (i.e. manufactured items that are built to last at least 3 years, like washing machines and jet aircraft) declined by 0.4% last month. Wall Street economists were expecting a gain of about 0.3%.

  • The Consumer Confidence Index (CCI) fell to 87.3 this month. The CCI has declined each month since July of this year (July, 2007 CCI was 112.6.)

  • For the week that ended on November 24, there were an estimated 352,000 new claims for unemployment benefits, which was 12,000 more claims than Wall Street economists were expecting.

  • The Commerce Department reported that construction spending fell by 0.8% last month; Wall Street economists were expecting a decline of around 0.3%.

The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the December 11TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 25 basis points at the December 11TH, 2007 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Monday, December 3, 2007: The Institute for Supply Management releases the Purchasing Manager's Index (PMI) report for November.

  • Friday, December 7, 2007: The Labor Department releases the November Employment Situation Report.

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Monday, November 26, 2007

Odds On A Rate Cut for the December 11 FOMC Meeting Now At 96%

You may have experienced some manifestation of the credit crunch going on in America's financial markets. Perhaps you were counting on getting a "no documentation" loan to buy your first house, but now find that these loans aren't available in your area. Or maybe the credit limit on your favorite credit card was recently reduced -- or perhaps the interest rate was raised -- even though you have an 800+ credit score and use credit very cautiously.

Hold on to your wallet, because credit markets may get worse before they get better. And to add salt to the proverbial wound, Wall Street has been increasing bets that a recession is lurking in the bushes, waiting for the perfect moment to pounce. Investors continued to move capital to the safety of government bonds today, which resulted in the yield on the benchmark 10-year treasury note dropping to 3.847%, a level not seen in over three years. The Dow Jones Industrial Average (DJIA) fell by 237.44 points, or 1.83%, while the S&P 500 lost 2.32% and the NASDAQ Composite fell by 2.14%. For the DJIA, today marked the first official correction since 2003. For the year, the DJIA is up only 2.249%.

The investors who trade in fed funds futures are now almost certain that the Fed will cut short-term rates again on December 11. If the Fed cuts, the dollar may get weaker against other major currencies; let's hope it doesn't collapse.


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 96% (according to current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the December 11TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.25% after the December 11TH, 2007 FOMC monetary policy meeting: 96% (very likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Monday, November 19, 2007

Odds On A Rate Cut for the December 11 FOMC Meeting Now At 86%

Right now, the big question is: has the Fed cut short-term interest rates enough to preclude a recession, or will the Fed have to cut again on December 11 and risk serious reflation?

The Fed has been sending strong hints that it is done with lowering rates for now, but many on Wall Street are still quite confident that the Fed will once again cut the benchmark Fed Funds Target Rate next month.

Here's a clip from the statement released by the Fed when they cut rates on October 31:

"...The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth..."

And here's a clip from a recent speech made by Federal Reserve Governor Randall Kroszner:

"...A sequence of data releases consistent with the rough patch for economic activity that I expect in coming months would not, by themselves, suggest to me that the current stance of monetary policy is inappropriate...."

The fed funds futures market had odds on a rate cut at 92% last week. But odds are now at 86%, thanks in no small part to Dr. Kroszner's comments (as a Federal Reserve Governor, Kroszner is a voting member of the interest-rate setting Federal Open Market Committee [FOMC].)

With such hints from key Fed officials you would think that the odds on a rate cut would be much lower, right? But there are many on Wall Street who feel that important sectors of the economy and credit market conditions will deteriorate enough by December 11 that the Fed will opt to cut rates again.

Some of the most convincing data that supports the notion that the economy may be recession-bound comes from the U.S. Treasuries market. Historically and statistically, when the yields on Treasury securities with maturities from 3 months to 10 years are below the fed funds rate, a recession is likely to occur. Right now, the fed funds rate is 4.5%, which is an exact match with the Fed's target. Meanwhile, yields on government securities currently look like this:

  • 3-Month Treasury Bill: 3.38%
  • 6-Month Treasury Bill: 3.52%
  • 2-Year Treasury Note: 3.20%
  • 3-Year Treasury Note: 3.10%
  • 5-Year Treasury Note: 3.57%
  • 10-Year Treasury Note: 4.08%

Since all of the above yields are below 4.5%, it's no wonder that many on Wall Street are expecting trouble ahead.


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 86% (according to current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the December 11TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.25% after the December 11TH, 2007 FOMC monetary policy meeting: 86% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Thursday, November 15, 2007

Odds On A Rate Cut for the December 11 FOMC Meeting Now At 92%

Overall consumer prices rose by 0.3% last month, while the "core" index, which excludes food and energy, rose by 0.2%, according to data released by the Labor Department this morning. The monthly report on wholesale prices, released yesterday, showed that October wholesale inflation was tamer than economists were predicting, with the headline figure at +0.1%, and the core figure at +0.0%.

The latest core inflation numbers are reasonably healthy, which means that the Fed has some room to lower short-term interest rates again when the Federal Open Market Committee (FOMC) meets for the final monetary policy meeting of the year on December 11. The Fed may decide that another rate cut is necessary to help improve persistent liquidity issues in financial markets, the housing slump, and to forestall a recession.

According to the fed funds futures market, rates are likely to be slashed by another 0.25 percentage point next month, as investors are currently 92% certain (according to current pricing on contracts) that the Fed will vote to ease.

Another interest rate cut next month might cause the already weak dollar to continue to decline against other major currencies, like the euro and the Loonie. The Fed really doesn't mind, as a weak dollar makes American goods and services more attractive to non-U.S. businesses and consumers, and it makes foreign goods more pricey for Americans -- both are good for the U.S. economy. It also makes foreign travel more expensive for Americans, which might be enough to convert that European vacation to a holiday in Florida.

Another rate cut would also stoke the flames of inflation, and Americans are already getting grumpy about the high cost of fuel, as well as escalating prices at the supermarket. Consumers are getting tired of hearing the Fed talk about core inflation, when it's headline inflation that really matters to their bottom line. Not all of us drive or buy heating oil, but we all eat.

The good news is that the Fed has been listening, as evidenced by comments made by Fed chief Bernanke in a recent speech. Here's a clip:

"...Ultimately, households and businesses care about the overall, or 'headline,' rate of inflation; therefore, the FOMC should refer to an overall inflation rate when evaluating whether the Committee has met its mandated objectives over the long run. For that reason, the Committee has decided to publish projections for overall inflation as well as core inflation. In its policy statements and elsewhere, the Committee makes frequent reference to core inflation because, in light of the volatility of food and energy prices, core inflation can be a useful short-run indicator of the underlying trend in inflation. However, at longer horizons, where monetary policy has the greatest control over inflation, the overall inflation rate is the appropriate gauge of whether inflation is at a rate consistent with the dual mandate..."

The FOMC also announced that it will release projections for economic growth and inflation not twice but four times every year from now on.

The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 92% (according to current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the December 11TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.25% after the December 11TH, 2007 FOMC monetary policy meeting: 92% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Thursday, November 08, 2007

Odds On A Rate Cut for the December 11 FOMC Meeting Now At 70%

Some good news and bad news related to the U.S. economy to report today. First, the bad:

  • Problems related to America's low-quality mortgage loans and financial market liquidity crunch continue to plague the nation. The Dow Jones Industrial Average (DJIA) fell by over 360 points yesterday (all 30 DJIA components declined on the day), as investors got bearish on financial and other stocks that may be affected by subprime debt. Auto giant General Motors lost $39 billion last quarter, the biggest quarterly loss ever for the company, and, believe it or not, subprime debt was a factor (GM owns about half of the financing company GMAC, which has exposure to the subprime nightmare.)

  • The dollar's decline has many economists, academics and investors wondering if countries that hold huge stacks of the currency-- like China and Japan -- will eventually give up on it and rearrange their foreign-asset portfolios. Debt has been propping up the American economy for some time now, and if U.S. Treasuries suddenly become unpalatable, the American consumer ultimately will suffer (this scenario is not likely, however, since dumping dollars would result in a substantial capital loss, and both China and Japan want Americans to keep spending beyond their means on the stuff they make.)

  • Right now, a barrel of crude oil for future delivery costs $96.90, and is widely expected to rise above the $100 level in the near future. The dollar's decline, in cahoots with strong demand and inadequate refining capacity, are all driving prices higher. It's likely that Americans will eventually curtail their spending as a result, which could precipitate a recession.
Good news:

  • Preliminary figures from the Labor Department indicate that non-farm productivity advanced by 4.9% last quarter, while labor costs declined by 0.2%. This bodes well for the American economy and the American consumer: increased productivity and lower labor costs mean an owner can do more hiring or pay his/her current workers more without passing the cost onto the consumer (which would contribute to inflation.) All in all, it's good news for Americans' standard of living.

It looks like the bad news easily outweighs the good, doesn't it? Well, traders in fed funds futures certainly think so, as they are betting that the Fed will once again lower short-term interest rates when the Federal Open Market Committee (FOMC) meets for the final monetary policy meeting of the year on December 11.


The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 70% (according to current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the December 11TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.25% after the December 11TH, 2007 FOMC monetary policy meeting: 70% (somewhat likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Wednesday, October 31, 2007

Fed Rate Decision Today: Odds On A Cut at 94%

A week ago, the odds that the Fed will opt to lower short-term interest rates on Halloween were at 100%, according to pricing on contracts at the fed funds futures market. Right now, the market isn't as confident as it was 7 days ago that a rate cut is coming later this afternoon, but the odds are still quite strong in favor of a cut; 94% strong.

So if you're hoping that the Fed will deliver a treat for American consumers this Halloween, then you most likely won't be disappointed.

Since the Federal Open Market Committee (FOMC) opted to cut aggressively last month, there is a slight chance that the FOMC will opt to shift to wait-and-see mode today and vote to leave interest rates alone. After all, many sectors of the economy are doing just fine, and the employment situation is still rosy. If the group chooses to do nothing with the Federal Funds Target Rate later today, the dollar may recover a bit, but the stock market will almost certainly react negatively. The Fed doesn't want to cut just to give Wall Street what it wants or expects, but a sharp decline in stocks could combine with credit market turmoil, housing woes and subprime misery and cause the economy to decelerate into recession, and the Fed doesn't want that either. So, if the Fed is actually on the fence about cutting rates right now, the Wall Street element may just be the factor that gets the FOMC to cut rates today.

--

The Fed will release their decision on interest rates at around 2:15 this afternoon. Stay tuned!


The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 94% (according to current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting (today.)


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 FOMC monetary policy meeting: 94% (very likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Wednesday, October 24, 2007

Futures Market Now Certain That A Rate Cut Will Happen On October 31

Earlier today, the National Association of Realtors® released the existing homes sales report for September. According to the report, sales of preowned homes fell by 8.0% since August, and by 19.1% since September of '06. The median price for a used home was down by 4.2% when compared to 12 months previous, while the average price was down by 3.2%. Inventories of preowned homes remained high, which portends more pain for the housing sector for months to come.

The futures market reacted to today's housing news: the odds on a rate cut for the October 31ST Federal Open Market Committee (FOMC) monetary policy meeting jumped to 100%. It's a pretty safe bet that news of Merrill Lynch's worst quarterly loss in the company's history also influenced the futures market this morning. Merrill is the latest casualty of the nation's subprime mortgage debacle.

Here's another safe bet: if the Fed cuts rates as expected, the dollar will continue to decline and commodities like crude oil and gold will likely soar to record highs. Yep.

--

Looks like consumers are in for a treat this Halloween: the cost of borrowing in America is about to get a bit cheaper.


The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 100% (according to current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Friday, October 19, 2007

Odds On A Rate Cut for the October 31 FOMC Meeting Hit 92% On Flight to Quality

Stocks fell sharply today -- over 2.5% for each of the 3 major indexes. The Dow Jones Industrial Average (DJIA) lost 367 points; all 30 component companies that make up the DJIA retreated today. Today also happens to be the anniversary of the 1987 stock-market crash. Hmmm...

Investors got spooked by disappointing earnings reports and by continued concern about the turmoil that still exists in international credit markets. Lots of Wall Street money was moved to the safety of U.S. Treasuries, as evidenced by lower yields on the 30-year bond and the 10-year note.

Crude oil and gold prices surged, as the dollar once again lost ground against the euro and other major currencies this week. But the dollar's continued decline wasn't enough to convince futures traders that the Fed won't cut interest rates on October 31. In fact, the investors who trade in fed funds futures are now quite confident that the Fed will lower short-term interest rates on Halloween; 92% confident. Odds on a rate cut were at 70% yesterday.


The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 92% (according to current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 FOMC monetary policy meeting: 92% (likely)

  • NB: U.S. Prime Rate, currently @ 7.75%, = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Wednesday, October 24, 2007: The National Association of Realtors® releases the Existing Home Sales report for September.

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Thursday, October 18, 2007

Odds On A Rate Cut for the October 31 FOMC Meeting Shoot Up to 70% On Higher-Than-Expected Unemployment Insurance Claims

Early this morning, the Labor Department reported that 337,000 Americans lined up to claim unemployment benefits for the first time during the week that ended on October 13. This news came as a surprise to Wall Street, as economists were expecting around 312,000 new claims for unemployment benefits.

The fed funds futures market reacted swiftly to the latest employment news. The odds on a rate cut for October 31, which were at 54% yesterday, are now at 70%. Still not a sure thing, but there's still plenty of time before the Halloween decision about short-term rates, and the markets that move commercial paper are still quite constipated. Stay tuned.


The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 70% (according to current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 FOMC monetary policy meeting: 70% (somewhat likely)

  • NB: U.S. Prime Rate, currently @ 7.75%, = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Wednesday, October 24, 2007: The National Association of Realtors® releases the Existing Home Sales report for September.

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Wednesday, October 17, 2007

Odds On A Rate Cut for the October 31 FOMC Meeting Now at 54%

The fed funds futures market is currently betting -- albeit without too much certainty -- that the Federal Open Market Committee (FOMC) will vote to lower short-term interest rates on October 31ST. On October 9, the odds on a rate cut were at 36%. Right now, the odds are at 54%. Influencing the futures market this week:

  • The Commerce Department reported that there were 1,191,000 housing starts last month; that's 10.2% below the August estimate, and 30.8% below the September, 2006 figure.

  • The Federal Reserve's most recent anecdotal survey of the U.S. economy, also known as the Beige Book, contained the following:

    ...Residential real estate markets continued to weaken, and most Districts reported additional declines in home sales, prices and construction. Financial institutions reported an increase in delinquencies and slight deterioration in credit quality. Lenders in many Districts tightened credit standards, particularly for real estate. The majority of reports indicated an increase in business lending but a decline or slower growth in consumer lending...

    ...Contacts in a number of industries indicated a higher-than-usual degree of uncertainty about the outlook for economic activity. Many real estate contacts expect housing markets to remain subdued for several months. At firms without direct ties to real estate and construction, contacts are still wary that credit tightening and slowing construction might slow activity in their industry, but there is cautious optimism because few see much evidence of such spillovers at this time..."

  • In a recent speech in New York, Fed boss Ben Bernanke made the following comments:

    ...This has been a challenging period. Conditions in financial markets have shown some improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time, and we may well see some setbacks. In particular, investors are continuing to reassess the risks they face and have not yet fully regained confidence in their ability to accurately price certain types of securities. The ultimate implications of financial developments for the cost and availability of credit, and thus for the broader economy, remain uncertain.

    In coming months, the Federal Reserve, together with other agencies both here and abroad, will perform comprehensive reviews of recent events to better understand the episode and to draw lessons for the future. For now, the Federal Reserve will continue to watch the situation closely and will act as needed to support efficient market functioning and to foster sustainable economic growth and price stability...

The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 54% (according to current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 FOMC monetary policy meeting: 54% (somewhat likely)

  • NB: U.S. Prime Rate, currently @ 7.75%, = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Wednesday, October 24, 2007: The National Association of Realtors® releases the Existing Home Sales report for September.

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Tuesday, October 09, 2007

Odds On A Rate Cut for the October 31 FOMC Meeting Drop to 36% On Release of FOMC Minutes

Earlier today, the Fed released the minutes from the September 18 FOMC monetary policy meeting; the Fed decided to lower the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) on September 18, which caused the U.S. Prime Rate to drop from 8.25% to the current 7.75%. Here are a few clips from those minutes:

...Although employment probably was not as weak as the most recent monthly data had suggested, trend growth in jobs had fallen off even prior to the recent financial market strains, and participants judged that some further slowing of employment growth was likely. Indeed, financial services firms had already announced layoffs, largely reflecting mortgage market developments, the demand for temporary workers appeared to have softened, and the most recent weakening in construction employment was likely to continue for a while. Moreover, if declines in house prices were to damp consumption, that could feed back on employment and income, exerting additional restraint on the demand for housing. Nonetheless, to date, initial claims for unemployment insurance did not indicate a substantial and widespread weakening in labor demand, and labor markets across the country generally remained fairly tight, with several participants citing continued reports of shortages of labor from their contacts in some sectors...

...The housing sector remained exceptionally weak. Home sales had dropped considerably this year: Sales of new and existing single-family homes in July were down substantially from their averages over the second half of last year. Demand was restrained by deteriorating conditions in the subprime mortgage market and by an increase in rates for thirty-year fixed-rate conforming mortgages. In the nonconforming mortgage market, the availability of financing to borrowers recently appeared to have been crimped even further. Most forward-looking indicators of housing demand, including an index of pending home sales, pointed to a further deterioration in sales in the near term. Single-family starts slid in July to their lowest reading since 1996, and adjusted permit issuance continued on a downward trajectory. Although single-family housing starts had come down substantially from their peak, the drop had lagged the decline in demand, and as a result, inventories of new homes had risen considerably. In the multifamily sector, starts in July were in line with readings thus far this year and at the low end of the fairly narrow range seen since 1997. Meanwhile, house prices generally continued to decelerate...

...The Committee agreed that the statement to be released after the meeting should indicate that the outlook for economic growth had shifted appreciably since the Committee's last regular meeting but that the 50 basis point easing in policy should help to promote moderate growth over time. They also agreed that the inflation situation seemed to have improved slightly and judged that it was no longer appropriate to indicate that a sustained moderation in inflation pressures had yet to be shown. Nonetheless, all agreed that some inflation risks remained and that the statement should indicate that the Committee would continue to monitor inflation developments carefully. Given the heightened uncertainty about the economic outlook, the Committee decided to refrain from providing an explicit assessment of the balance of risks, as such a characterization could give the mistaken impression that the Committee was more certain about the economic outlook than was in fact the case. Future actions would depend on how economic prospects were affected by evolving market developments and by other factors...

The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 36% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) of the Federal Reserve will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 FOMC monetary policy meeting: 36% (not likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3) = 7.75%.

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

Wednesday, October 17, 2007: The Labor Department releases the Consumer Price Index report for September.

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Friday, October 05, 2007

Odds On A Rate Cut for the October 31 FOMC Meeting Now at 48%

According to this morning's jobs report, the American workforce grew by 110,00 jobs during September, and the unemployment rate rose to 4.7%. Economists were expecting a rise of about 150,000 new, non-farm payrolls for September, so the actual figure came as no real surprise to economists and rate watchers.

What's surprising to me is the fact that Wall Street takes the initial report on non-farm payrolls released by the Labor Department seriously. The discrepancy between the initial, non-farm payrolls report for a given month and the revised report released a month later is often significant, and sometimes the discrepancy is so wide that it makes me wonder why the Labor Department doesn't seriously rework the way it reports its numbers. For example, last month the Department of Labor reported that the U.S. economy lost 4,000 jobs during August. Today, the Labor Department released revised figures for August, and reported that the economy actually gained 89,000 jobs! From -4,000 to +89,000? Makes me wonder if the Fed cut too aggressively on September 18 (the Fed cut the benchmark Fed Funds Target Rate by 50 basis points on September 18, which caused the U.S. Prime Rate to drop from 8.25% to 7.75%.)

Nevertheless, the fed funds futures market reacted to today's employment report, and is now on the fence as to whether the Fed will opt to lower rates or do nothing on October 31.

The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 48% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) of the Federal Reserve will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 FOMC monetary policy meeting: 48% (on the fence)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3) = 7.75%.

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Wednesday, October 17, 2007: The Labor Department releases the Consumer Price Index report for September.

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Wednesday, September 26, 2007

Probability that The Fed Will Cut Rates Again on October 31 Now At 84%

Last week's aggressive rate cut by the Fed, which knocked the U.S. Prime Rate down from 8.25% to the current 7.75%, has left everyone asking the big question: will the Federal Open Market Committee (FOMC) cut short-term interest rates again when they next decide on rates on October 31? Right now, the fed funds futures market is 84% certain that the Fed will cut rates again, by 25 basis points (0.25 percentage point) this time.

But does the U.S. economy really need another rate cut? Of course, no one knows for sure, as monetary policy is hardly an exact science, but we'll have a much better idea of how the economy is doing when the next jobs report is released by the Labor Department on October 5.

So far this week, the news has been pretty gloomy:

  • Yesterday, the National Association of Realtors® reported that sales of existing (preowned) homes fell by 4.3% last month. Right now, there are more than 4.5 million used homes available on the market, which is 10 months supply. This, of course, is bad news for homeowners looking to sell, because it puts downward pressure on prices.

  • Earlier today the Commerce Department reported that new orders for manufactured durable goods fell by 4.9% last month (economists were expecting a decline of about 3.1%.)

The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 84% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) of the Federal Reserve will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 FOMC monetary policy meeting: 84% (likely)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3).

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Friday, October 5, 2007: The Labor Department releases the Employment Situation report for September.

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Tuesday, September 18, 2007

Prime Rate Is Set to Drop to Either 8.0% or to 7.75%

The Federal Open Market Committee (FOMC) will release it's decision on interest rates later today (~2:15 p.m. Eastern Time) and, as of right now, the futures market is pricing 50% odds of a 25 basis point cut, and 50% odds of a 50 basis point reduction for the Fed Funds Target Rate. In other words, the market is certain that the Prime Rate will be cut today, but it's not sure whether the cut will be to 8.0% or to 7.75% (the current U.S. Prime Rate is 8.25%.)

I'm sticking with my prediction that the Fed will opt for a 25 basis point (0.25 percentage point) cut later today. The Fed doesn't want to cut too aggressively now and possibly cause inflation problems down the road, in my opinion. If the FOMC cuts too aggressively now, and prices inflate at too high a pace later, then the FOMC may have to raise short-term rates beyond their current levels in the future, and higher rates would in turn restrain economic growth.

Furthermore, crude oil for future delivery is right now trading at $80.72 per barrel in New York -- record highs -- and high crude oil prices could easily turn up the flames of inflation. Crude could go as high as $100 per barrel before hurricane season ends. We now live in an era of "popup hurricanes," hurricanes that can develop almost instantaneously near the shores of the Gulf of Mexico. FYI: The Atlantic hurricane season last from June 1 to November 30.


The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 100% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) of the Federal Reserve will elect to lower the benchmark Federal Funds Target Rate by at least 25 basis points at the September 18TH, 2007 monetary policy meeting (later today.)


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 0.25 percentage point after the September 18TH, 2007 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3).

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Friday, September 07, 2007

Decline In Non-Farm Payrolls Virtually Guarantees A Rate Cut for September 18

Investors on Wall Street expect the Fed to lower short-term interest rates on September 18. But the Fed isn't going to lower rates just because Wall Street wants it to.

The Fed is not going to lower short-term rates in response to the current credit crunch happening in the financial markets. Furthermore, the Fed is not going to lower rates in order to help the struggling housing sector.

The Fed, however, will lower rates if one or more of the major macroeconomic numbers, like employment or GDP, warrant a rate cut. Earlier this morning, the Labor Department delivered those numbers.

According to the Department of Labor, the American workforce lost 4,000 jobs last month, the first month-to-month decline in non-farm payrolls since the summer of 2003. The numbers in the August jobs report are very significant for the Fed, because the group can now lower short-term interest rates (rationale: a preemptive strike against recession) without having to worry about being accused of caving in to what Wall Street wants.

Right now, the fed funds futures market is 76% certain that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points on September 18, with 24% betting that the Fed will opt for a 25 basis point cut. In other words, the market is 100% sure that the U.S. Prime Rate will be cut by at least 0.25 percentage point on September 18 (the current U.S. Prime Rate is 8.25%.)

I'm thinking that the Fed will lower rates by 25 basis points on September 18, then possibly lower rates by another 25 basis points on October 31. I don't think the Fed is going to cut rates aggressively, i.e. by 50 basis points in one shot, while the broader economy is still quite strong, and risk stoking the flames of inflation. Yes, the news that non-farm payrolls declined last month wasn't positive, but the unemployment rate held steady at a reasonably healthy 4.6%. And remember, the cost of crude oil can have a significant impact on inflation, and crude for future delivery finished the week at $76.70 per barrel (crude was at $66.25 at this time last year.)

The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 100% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) of the Federal Reserve will elect to lower the benchmark Federal Funds Target Rate by at least 25 basis points at the September 18TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut by at least 0.25 percentage point after the September 18TH, 2007 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Sunday, August 26, 2007

Despite Positive Economic News, Futures Market Still Betting On A Rate Cut for September 18

A week ago, the fed funds futures market was certain that the Federal Open Market Committee (FOMC) will vote to lower short-term interest rates at their next monetary policy meeting on September 18. Well, as of today, the futures market is still certain that the Fed will cut rates next month, despite some positive economic news released by the government on Friday, and some interesting moves made by some of America's biggest banks. In fact, a significant minority in the market are betting that the Fed will lower rates by 50 basis points, which would in turn knock the Prime rate down to 7.75%.

Notable news from this week:

  • Bank of America purchased a $2 billion stake in Countrywide Financial in an effort to stabilize the mortgage giant. Countrywide in the nation's #1 home-loan lender.

  • The Bank of America, Citigroup, JP Morgan Chase and Wachovia each borrowed $500 million via the Federal Reserve's discount window at 5.75%. These large banks didn't need to borrow the cash at the discount rate (they could have borrowed and paid less than 5% for the privilege via the fed funds market.) These were basically "follow our lead" actions, to get other banks to borrow via the discount window and ultimately get more cash moving around the financial markets.

  • On Friday, the Commerce Department reported that orders for durable goods -- goods that are designed to last more than 3 years, like washing machines -- rose by 5.9% last month. Economists were expecting a rise of about 1.0% for July.

  • Last month, 870,000 newly-built homes were sold across the country, according to the Commerce Department. That was 2.8% above the revised June figure. Economists were expecting around 820,000 new home sales for July.

Stay tuned for the big one: The Employment Situation report for August, which will be released the morning of September 7TH. The forecast for the Prime Rate will be far more meaningful after the release of the August jobs report.


The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 100% (according to current pricing on contracts) that the FOMC of the Federal Reserve will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points at the September 18TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 8.00% after the September 18TH, 2007 FOMC monetary policy meeting: 100% (certain)

  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Friday, September 7, 2007: The Labor Department releases the Employment Situation report for August.

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Friday, August 17, 2007

Fed Cuts Discount Rate; Future Market Now Certain That The FOMC Will Cut The Fed Funds Target Rate On September 18

Earlier today, in a continuing effort to calm the rough waters of the financial markets, the Fed cut* the Discount Rate from 6.25% to 5.75%. And to get financial institutions to use the discount window, Fed officials assured major U.S. banks that using the discount window would not be perceived as a sign of weakness (the Fed's discount window is usually only tapped by banks when they can't secure temporary funds from other banks.)

The Federal Open Market Committee (FOMC) of the Federal Reserve also issued the following statement today:

"Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

Voting in favor of the policy announcement were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Richard W. Fisher; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Michael H. Moskow; Eric Rosengren; and Kevin M. Warsh."
The above statement is significant because:

  • The group dropped any language related to inflation, which is appropriate considering current conditions. The Fed's priorities have shifted. This means that the Fed is prepared to lower the Fed Funds Target Rate if the current credit crisis doesn't abate in a significant way before the next FOMC monetary policy meeting.

  • Also very significant:
    "...the Federal Open Market Committee judges that the downside risks to growth have increased appreciably..."
    To translate the Fed speak, "increased appreciably" can be interpreted to mean "a whole lot." Yet another signal that the Fed's is ready to lower the Fed Funds Target Rate if the cautious steps it has taken so far don't work.

Five days ago, I was not of the opinion that the Fed would cut the Fed Funds Target rate next month. However, having read today's FOMC statement, I am now in agreement with the Fed Funds Futures market, which is now pricing in 100% odds that the Fed will lower rates on September 18.

Wall Street was happy with today's Fed actions: the Dow Jones Industrial Average ended the day with a gain of over 233 points.

The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at 100% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) of the Federal Reserve will elect to lower the benchmark Federal Funds Target Rate by 25 basis points at the September 18TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 8.00% after the September 18TH, 2007 FOMC monetary policy meeting: 100% (certain)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Federal Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Sunday, August 12, 2007

Futures Market Is Very Confident That The Fed Will Cut Rates On September 18, 2007

Problems with America's subprime mortgages continue to create waves of fear in markets all around the world. Central banks across the globe have been pumping money into the world's banking systems in an effort to cool the sweaty brows of investors and bankers, and restore confidence and stability to credit markets. Last Friday, the Fed executed temporary repurchase agreements which ended up pumping a total of $38 billion into the nation's financial system, the most since the terrorist attacks of September 11, 2001. The European Central Bank (ECB) pumped $65.2 billion into the eurozone economy. More recently, Japan's central bank injected $5 billion into Japanese financial markets.

But, of course, the big question is: will the current credit crunch prompt the Fed to cut short-term interest rates at the next Federal Open Market Committee (FOMC) meeting, scheduled to take place on September 18, 2007? According to the Fed Funds Futures market: yes, the Fed will vote to lower rates (98% probability.)

Usually, I'm with the futures market, especially when it comes to predictions that are within 45 days of the next FOMC meeting, where predictions based on the Fed Futures market are most accurate. But I'm not with the futures market today. Yes, there's some liquidity-related ugliness out there right now, but that's not enough to get Bernanke & Co. to cut rates. The Fed is clearly interested in defending the currency, as evidenced by the Fed's incessant murmuring about the potential for the pace of inflation to rise to an unacceptable level. Here's a snippet from last week's Fed meeting:

"Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected."
Predictions are going to be all over the place right now. It's an interesting time and the Fed has made some interesting moves. For example, instead of temporarily buying back treasury notes and bills -- as the Fed did after the terrorist attacks on the World Trade Center -- the Fed chose instead to repurchase mortgage-backed securities (MBS) on August 9. This will almost certainly have the effect of shoring up the nation's flagging housing sector for a spell.

So, my prediction: the Fed will meet on September 18 and will vote to maintain short-term rates, including the Prime Rate, at their current level. As for predictions based on the Fed Funds Futures market:

The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at 98% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) of the Federal Reserve will elect to lower the benchmark Federal Funds Target Rate by 25 basis points at the September 18TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 8.00% after the September 18TH, 2007 FOMC monetary policy meeting: 98% (very likely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Federal Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Friday, July 27, 2007

Futures Market Now Predicts A Rate Cut by December, 2007

The Fed Funds Futures market has had a sudden and significant change of heart. Very recently, the market was pricing in a very slight chance that the Fed will cut interest rates this year. Right now, however, the futures market is pricing in 96% odds that the Fed will opt to lower short-term interest rates at the December 11, 2007 monetary policy meeting.

Why the sudden change? Well, the availability of large corporate loans -- the loans that have fueled the massive and numerous mergers and acquisitions around the country, and helped to drive the stock market to record highs -- appears to be drying up. And a credit crisis may combine with other factors (like the still-waning housing market) and prompt the Fed to lower interest rates at the end of the year.

Continued bad news from the nation's housing sector is also fueling speculation that the Fed will lower rates before 2008:

  • There's been trouble with subprime loans for many months now, but the latest bad news comes from the prime home-loan market. Countrywide Financial, the nation's #1 home-loan lender, recently reported disappointing earnings, and blamed the poor performance on problems with prime home-equity loans and pay option adjustable-rate mortgages. Countrywide's CEO, Angelo Mozilo, believes that we may have to wait until 2009 for a recovery of the U.S. housing sector.

  • On Wednesday, the National Association of Realtors® reported that existing home sales fell by 3.8% last month. When compared to sales 12 months ago, existing home sales were down by 11.4%.

  • Yesterday, the Commerce Department reported that new home sales fell by 6.6% last month. When compared to sales 12 months ago, new home sales were down by 22.3%.

So, what do we know right now? Since predictions related to the Fed Funds Futures market are most accurate within a 45-day window, it's almost a certainty that the Fed will leave the Federal Funds Target Rate (and thus the Prime Rate) at its current level when the group meets on August 7TH. As for predictions that the Fed will lower rates by the end of the year: we'll have to wait until November for the most accurate predictions.


The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at 96% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) of the Federal Reserve will elect to lower the benchmark Federal Funds Target Rate by 25 basis points at the December 11TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the August 7TH and September 18TH FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to 8.00% after the October 31ST, 2007 FOMC monetary policy meeting: 40% (unlikely)

  • Current odds that the Prime Rate will be cut to 8.00% after the December 11TH, 2007 FOMC monetary policy meeting: 96% (very likely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Federal Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Friday, August 3, 2007: The Labor Department releases the Employment Situation report for July.

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Friday, July 06, 2007

Current Odds Suggest The U.S. Prime Rate Will Hold at 8.25% Into 2008

The latest odds suggest that the U.S. Prime Rate will remain at the current 8.25% right into 2008. Influencing the fed-funds futures market this week:

  • The June Employment Situation report. According to the Labor Department, 132,000 new, non-farm jobs were added to the American workforce last month, and the unemployment rate held steady at 4.5%. Furthermore, the number of non-agricultural jobs added during May and April was revised significantly higher.

  • The Institute for Supply Management's Purchasing Manager's Index (PMI) for June was reported at 56% (any figure above 50% indicates that the manufacturing sector of the U.S. economy is expanding.)

The positive news related to U.S. employment and manufacturing translates to an increased likelihood that the Fed will keep short-term interest rates at their current level for the rest of the year.


The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at 6% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) of the Federal Reserve will elect to lower the benchmark Federal Funds Target Rate by 25 basis points at the December 11TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the August 7TH, September 18TH and October 31ST FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to 8.00% after the December 11TH, 2007 FOMC monetary policy meeting: 6% (very unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Federal Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Thursday, June 28, 2007

Fourth FOMC Meeting of 2007 Adjourned: The U.S. Prime Rate Holds at 8.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its fourth monetary policy meeting of 2007, and, in keeping with the latest forecast, the FOMC has voted to leave short-term interest rates at their current level. Therefore, the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street Journal® Prime Rate (also known as the U.S. or national Prime Rate) will remain at the current 8.25%.

Here's a clip from the press release that was issued by the FOMC earlier this afternoon:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh."

The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at 15% (according to current pricing on contracts) that the FOMC will opt to lower the benchmark Federal Funds Target Rate by 25 basis points at the December 11TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the August 7TH, September 18TH and October 31ST FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to 8.00% after the December 11TH, 2007 FOMC monetary policy meeting: 15% (very unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Federal Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Wednesday, June 06, 2007

Probability of A Rate Cut for The October 31, 2007 FOMC Monetary Policy Meeting Now At 10%

The Dow Jones Industrial Average (DJIA) lost almost 1% today (129.79 points) as many investors who were still daydreaming about the possibility that the Fed will cut short-term interest rates this year woke up. Fact is, the writing has been on the wall for some time now: Fed boss Ben Bernanke has been talking about the potential for inflation to rise above the Fed's comfort zone for some months now. Just yesterday, Dr. Bernanke made the following remarks about inflation:

"...As expected, we have also seen a gradual ebbing of core inflation, although its level remains somewhat elevated. Despite recent increases in the prices of crude oil and gasoline, energy prices overall are below last year’s peak; the rate of increase in shelter costs seems likely to slow, although the timing remains uncertain; and long-run inflation expectations, as derived from both surveys and market-based measures of inflation compensation, have remained contained. However, although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside. In particular, the continuing high rate of resource utilization suggests that the level of final demand may still be high relative to the underlying productive capacity of the economy..."

A key report on U.S. productivity and labor costs released today acted as an extra splash of cold water for investors. For Q1, 2007, the non-farm productivity gain was revised downward to 1.0%, and the unit labor costs figure was revised up to 1.8%.


The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at 10% (according to current pricing on contracts) that the FOMC will choose to lower the benchmark Federal Funds Target Rate by 25 basis points at the October 30-31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the June 28TH, August 7TH and September 18TH FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to 8.00% after the October 31ST, 2007 FOMC monetary policy meeting: 10% (very unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Federal Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Friday, June 01, 2007

Prime Rate Very Likely To Remain at 8.25% Through At Least September

A pair of key economic reports were released today: the Employment Situation Report for May and the Institute for Supply Management's purchasing manager's index (PMI). The data in both reports indicate that the U.S. economy is doing OK, which, in turn, means that the Fed is likely to keep short-term interest rates at their current level for the rest of the year.

  • According to the May Employment Situation Report, 157,000 new jobs were added to the American workforce last month (Wall Street forecasters were expecting about 135,000 new jobs), and the unemployment rate held steady at 4.5%.

  • The PMI for May was 55% (any figure above 50% indicates that the manufacturing sector of the U.S. economy is expanding.)

The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at 0% (according to current pricing on contracts) that the FOMC will opt to lower the benchmark Federal Funds Target Rate by 25 basis points at the September 18TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the June 28TH, August 7TH and September 18TH FOMC monetary policy meetings.

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Friday, May 25, 2007

Probability of A Rate Cut for The September 18, 2007 FOMC Monetary Policy Meeting Now At 16%

A rate cut by the Fed at some point this year is now an even more remote possibility, thanks to an encouraging report on new home sales and escalating crude oil prices.

Housing Turnaround?

Though mortgages rates are still at historically low levels, subprime lending is on the decline, a fact that contributed to existing home sales falling by 2.6% last month. New home sales, on the other hand, jumped by a strong 16.2% in April. The new homes sales figure for April -- 981,000 -- was considerably higher than the 860,000 or so that Wall Street forecasters were expecting. Investors interpreted the new home sales numbers as a hint that the U.S. housing sector may be headed for a turnaround, maybe.

The Summer Driving Season is Upon Us

Placing upward inflationary pressure on the U.S. economy right now: rising crude oil prices. A barrel of crude oil for future delivery closed at $65.20 today; that's 5.28% higher than the closing price on May 4, 2007. $65 per barrel may seem high, but for some perspective, at this time last year -- May 26, 2006 -- crude oil finished the week at $71.29.

The Fed is still concerned about inflation, and the group won't cut short-term interest rates until the inflation threat is well-contained.


The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at around 16% (according to current pricing on contracts) that the FOMC will choose to lower the benchmark Federal Funds Target Rate by 25 basis points at the September 18TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the June 28TH and August 7TH FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to 8.00% after the September 18TH, 2007 FOMC monetary policy meeting: 16% (very unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Friday, June 1, 2007: The Labor Department releases the May, 2007 Employment Situation report.

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Wednesday, May 09, 2007

Third FOMC Meeting of 2007 Adjourned: The Prime Rate Holds at 8.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its third monetary policy meeting of 2007, and, in keeping with the latest forecast, the FOMC has voted to leave short-term interest rates at their current level. Therefore, the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street Journal® Prime Rate (also known as the U.S. or Fed Prime Rate) will remain at the current 8.25%.

Here's a clip from the press release that was issued by the FOMC earlier this afternoon:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters.

Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh."

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 15% (according to current pricing on contracts) that the FOMC will choose to lower the benchmark Federal Funds Target Rate by 25 basis points at the August 7TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the June 28TH, 2007 FOMC monetary policy meeting.

  • Current odds that the Prime Rate will be cut to 8.00% after the August 7TH, 2007 FOMC monetary policy meeting: 15% (very unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic reports:

  • Friday, May 11, 2007: The Labor Department releases the Producer Price Index (PPI) report for March, 2007.

  • Tuesday, May 15, 2007: The Labor Department releases the Consumer Price Index (CPI) report for March, 2007.

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Friday, May 04, 2007

Probability of A Rate Cut for The August 7, 2007 FOMC Monetary Policy Meeting Now At 17%

The Federal Open Market Committee (FOMC) will convene the next monetary policy meeting next week (Wednesday, May 9, 2007) and it is a very safe bet that the Fed will opt to leave the benchmark Fed Funds Target Rate at 5.25%, which means that Prime Rate will remain at 8.25%.

The Fed is also very likely to leave interest rates at their current level after the June 28TH monetary policy meeting.

As for the future beyond June of this year, the fed funds futures market -- the best predictor of where interest rates are headed -- is currently pricing in odds at near 100% that the Fed will lower rates by 25 basis points (0.25 percentage point) by the time the December 11TH, 2007 monetary policy meeting is upon us (it's important to note that predictions based on the fed funds futures market are most accurate 45 days into the future, due to the numerous economic variables involved.)

Influencing the fed funds futures market this week were some encouraging reports on U.S. manufacturing and productivity, but the week ended on a somewhat down note with the Labor Department's release of the jobs figures for April. Economists were expecting the new payrolls figure to be at or around 100,000, but the U.S. economy added 88,000 jobs last month. Furthermore, the unemployment rate rose from 4.4% to 4.5%, and the new payrolls figures for both March and February were revised downward.


The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 17% (according to current pricing on contracts) that the FOMC will opt to lower the benchmark Federal Funds Target Rate by 25 basis points at the August 7TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the May 9TH and June 28TH, 2007 FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to 8.00% after the August 7TH, 2007 FOMC monetary policy meeting: 17% (very unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic reports:

  • Friday, May 11, 2007: The Labor Department releases the Producer Price Index (PPI) report for March, 2007.

  • Tuesday, May 15, 2007: The Labor Department releases the Consumer Price Index (CPI) report for March, 2007.

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Wednesday, April 11, 2007

Probability of A Rate Cut for The August 7, 2007 FOMC Monetary Policy Meeting Now At 25%

Earlier today, the Federal Reserve released the minutes from the March 21, 2007 Federal Open Market Committee (FOMC) monetary policy meeting. It's worth noting that the Fed hasn't ruled out the possibility of a rate increase at some point down the road, if inflation doesn't abate as expected. Here's a clip from the minutes:

"...The Committee agreed that further policy firming might prove necessary to foster lower inflation, but in light of the increased uncertainty about the outlook for both growth and inflation, the Committee also agreed that the statement should no longer cite only the possibility of further firming. Instead, the statement should indicate that future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information..."
Bottom line: the Fed is likely to remain in wait-and-see mode for some months.

Interest-rate futures traders reacted to the Fed minutes, lowering their expectations that the FOMC will elect to cut short-term rates later this year.

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 25% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by 25 basis points at the August 7TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the May 9TH FOMC monetary policy meeting.

  • Current odds that the Prime Rate will be cut to 8.00% after the June 28TH, 2007 FOMC monetary policy meeting: 8% (very unlikely)

  • Current odds that the Prime Rate will be cut to 8.00% after the August 7TH, 2007 FOMC monetary policy meeting: 25% (unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic reports:

  • Friday, April 13, 2007: The Labor Department releases the Producer Price Index (PPI) report for March, 2007.

  • Tuesday, April 17, 2007: The Labor Department releases the Consumer Price Index (CPI) report for March, 2007.

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Friday, April 06, 2007

Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 8%

Earlier today, the Labor Department released the Employment Situation report for March, 2007, and the numbers for March are strong. According to the report, 180,000 new jobs were added to the U.S. workforce last month (Wall Street was expecting 135,000 new jobs), and the unemployment rate fell from 4.5% to 4.4%.

The data in the March jobs report are a strong indication that the U.S. economy is doing quite well, which in turn means that the Fed is now less likely to lower short-term interest rates later this year.

Bottom line: The U.S. Prime Rate is now likely to remain at the current 8.25% right through the summer, and possibly into the fall as well.

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 8% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by 25 basis points at the June 28TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the May 9TH FOMC monetary policy meeting.

  • Current odds that the Prime Rate will be cut to 8.00% after the June 28TH, 2007 FOMC monetary policy meeting: 8% (very unlikely)

  • Current odds that the Prime Rate will be cut to 8.00% after the August 7TH, 2007 FOMC monetary policy meeting: 35% (unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic reports:

  • Friday, April 13, 2007: The Labor Department releases the Producer Price Index (PPI) report for March, 2007.

  • Tuesday, April 17, 2007: The Labor Department releases the Consumer Price Index (CPI) report for March, 2007.

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Friday, March 30, 2007

Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 28%

The core personal consumption expenditures (PCE) price index -- The Fed's preferred inflation gauge -- rose by 2.4% over the last 12 months. The Fed would like to see inflation somewhere between 1% and 2%, so the latest inflation data make a rate cut for this year less likely. Bottom line: the Fed most likely won't even consider cutting short-term interest rates while inflation continues to hover above the 2% mark.

Placing additional inflation pressure on the U.S. economy: the price on a barrel of crude oil for future delivery ended the week up at $65.87.

Here's a clip from testimony made by Fed chief Ben Bernanke before Congress 2 days ago:

"...Core inflation, which is a better measure of the underlying inflation trend than overall inflation, seems likely to moderate gradually over time. Despite recent increases in the price of crude oil, energy prices are below last year’s peak. If energy prices remain near current levels, greater stability in the costs of producing non-energy goods and services will reduce pressure on core inflation over time. Of course, the prices of oil and other commodities are very difficult to predict, and they remain a source of considerable uncertainty in the inflation outlook..."

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 28% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Fed Funds Target Rate by 25 basis points at the June 28TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the May 9TH FOMC monetary policy meeting.

  • Current odds that the Prime Rate will be cut to 8.00% after the June 28TH, 2007 FOMC monetary policy meeting: 28% (unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Friday, April 6, 2007: The Labor Department releases the Employment Situation report for March, 2007.

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Wednesday, March 21, 2007

Second FOMC Meeting of 2007 Adjourned: The Prime Rate Remains at 8.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned their second monetary policy meeting of 2007, and, in keeping with the latest forecast, the FOMC has voted to leave short-term interest rates at their current level. Therefore, the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street Journal® Prime Rate (also known as the U.S. or national Prime Rate) will remain at the current 8.25%.

Here's a clip from the press release that was issued by the FOMC earlier this afternoon:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh."

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 44% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Fed Funds Target Rate by 25 basis points at the June 28TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the May 9TH FOMC monetary policy meeting.

  • Current odds that the Prime Rate will be cut to 8.00% after the June 28TH, 2007 FOMC monetary policy meeting: 44% (unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic reports:

  • Friday, March 23, 2007: The National Association of Realtors® releases the Existing Home Sales report for February, 2007.

  • Monday, March 26, 2007: The Commerce Department releases the New Home Sales report for February, 2007.

  • Thursday, March 29, 2007: The Commerce Department releases the final Gross Domestic Product report for Q4, 2006.

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Friday, March 16, 2007

FOMC Meets On Wednesday: No Action Expected

The numbers from two critical inflation gauges were released this past week: the Producer Price Index (PPI) and the Consumer Price Index (CPI). Both the February CPI and the February PPI were higher than Wall Street was expecting, which translates to an decreased likelihood that the Fed will lower short-term interest rates later this year.

February Industrial Production was also higher than forecasters were expecting, which gives the Fed another reason to be concerned about inflation.

Whether or not the Fed will lower interest rates later this year is still hard to predict at this point. As for next Wednesday's Fed meeting (March 21ST), the vast majority of economists, academics and Wall Street forecasters agree that the Federal Open Market Committee (FOMC) will leave the Fed Funds Target Rate at 5.25%, which means the U.S. Prime Rate (WSJ Prime Rate) will remain unchanged at 8.25%.


The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 30% (according to current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the June 28TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the March 21ST and May 9TH FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to 8.00% after the June 28TH, 2007 FOMC monetary policy meeting: 30% (unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3).

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds.

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Friday, March 09, 2007

Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 32%

Are we headed for a recession? Of course, we'll get one eventually. But will we get one within the next 12 months?

Well, according to a yield-curve model created by the Fed, there's a 50/50 chance that the U.S. economy will contract for two quarters. Furthermore, former Fed boss Alan Greenspan recently predicted a one-in-three chance that the U.S. economy will sink into recession at some point this year.

And the bad news from the subprime mortgage industry keeps coming: New Century Financial Corporation recently reported that the company isn't accepting new loan applications, because its creditors won't let it. Shares of New Century Financial Corporation (NEW), which were trading in the $50 range during mid-2006, closed at $3.22 per share today.

  • The problem with the housing market is that it was strong for a number of years, thanks in no small part to very low interest rates. The hot housing market led to a rise in property values, which then prompted lenders to relax lending standards based on the reduced risk involved with home loans (higher home values = lender can recover more cash if the borrower defaults.) Now that home prices have been stagnant or falling in many regions across the country, lenders are now more stringent with their lending practices, which translates to fewer people qualifying for mortgages, which in turn contributes to the slowing housing market.

    Many home buyers who bought via an adjustable rate mortgage (ARM) assumed that home prices would continue to climb, which would make it easy to refinance once the loan resets ("resetting" is when the attractive, low-monthly-payments period -- also known as the "teaser" period -- ends, and the higher monthly payments begin.) Folks who opted for an ARM usually planned to either refinance before the loan reset, or sell the property before the loan reset. But if the value of a home doesn't rise significantly over time, then both selling and refinancing can be difficult due to lack of equity. Furthermore, if the borrower's credit score declines during the teaser period, then finding a good refinancing deal becomes much harder.


Ordinarily, news like the above would translate to an increased likelihood that the Fed will cut short-term interest rates later this year, but today's jobs report nullified the negative economic news, and led to a decreased likelihood that the Fed will lower rates before mid-2007.

According to the Labor Department's February Employment Situation Report, the unemployment rate dropped from 4.6% to 4.5%, and 97,000 new jobs were added to the American workforce. Furthermore, the January new jobs count was revised up from 111,000 to 146,000, and the December, 2006 figure was bumped up from 167,000 to 226,000.


The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 32% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by 25 basis points at the June 28TH, 2007 monetary policy meeting (odds on a rate cut for June were at 75% a week ago.)


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 8.00% after the June 28TH, 2007 FOMC monetary policy meeting: 32% (not likely)

  • Current odds that the Prime Rate will be cut to 8.00% after the August 7TH, 2007 FOMC monetary policy meeting: 79% (somewhat likely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3).

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic reports:

  • Thursday, March 15, 2007: The Labor Department releases the Producer Price Index (PPI) report for February.

  • Friday, March 16, 2007: The Labor Department releases the Consumer Price Index (CPI) report for February.

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Friday, March 02, 2007

Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 75%

There was some positive economic news on Thursday, as the Institute for Supply Management reported that their Purchasing Manager's Index (PMI) was 52.3% for February, 2007, which implies that manufacturing in the United States is expanding (a figure above 50% implies expansion, below 50% implies contraction; the January figure was 49.3%.) Positive news about U.S. manufacturing often translates to a decreased likelihood that the Fed will lower short-term rates, but the positive news was trumped by news of continued troubles for the nation's subprime mortgage industry.

Countrywide Financial, the nation's #1 independent mortgage company, recently reported that at the end of 2006, payments were late on nearly 20% of subprime loans. Yup: the bad news from the nation's subprime mortgage industry keeps coming (see previous bad news here and here); don't be surprised if we get more bad news in the coming weeks and months.

Over the past 12 months, more than twenty lenders have either shut down or put up a "for sale" sign as a result of bad home loans.

Investors have reacted to the latest bad news from the subprime mortgage industry: according to the pricing on Fed Funds Futures contracts, the Fed is now more likely to lower short-term interest rates later this year.

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 75% (according to current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the June 28TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 8.00% after the June 28TH FOMC monetary policy meeting: 75% (somewhat likely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Friday, March 9, 2007: The Labor Department releases the Employment Situation report for February.

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Tuesday, February 27, 2007

Probability of A Rate Cut for The May 9, 2007 FOMC Monetary Policy Meeting Now At 28%

China's Shanghai Composite stock market index sneezed today, and the world got the chills.

-----+-----

So far this week, we've had mostly negative economic news, news that translates to an increased likelihood that the Fed will lower short-term interest rates later this year.

First, it was comments made by Alan Greenspan in Hong Kong. The former Fed boss warned that the current growth cycle may be ending, and that the U.S. economy may slide into recession later this year. The economy has been growing since 2001, so I guess it's no surprise that the economy needs to take a nap.

Then the January durable goods orders report was released by the Commerce Department: orders fell by 7.8% last month (Wall Street was expecting a decline of about 3.0%.)

Wall Street then exhaled momentarily when this month's report on Consumer Confidence was released by The Conference Board: Wall Street was expecting a level of around 108; the actual figure was 112.5.

The economic news continued on a somewhat upbeat note as the National Association of Realtors released their report on existing home sales for January, 2007: though preowned-home prices are still declining, and preowned-home sales were 4.3% below the January, 2006 level, used home sales were up by 3% on a month-to-month basis.

Then the really bad news hit: China's Shanghai Composite Index fell by 8.8%, as investors unloaded stocks, fearful that the Chinese government may take steps to rein in stock market speculators. Apparently, lots of Chinese are investing their life savings and borrowing heavily in order to invest in equities.

Wall Street soon reacted to the Shanghai meltdown: each of the 3 major stock market indexes ended up losing over 3% on the day, with the Dow Jones Industrial Average (DJIA) dropping 416 points, the biggest drop for the DJIA since the 911 terror attacks.

Then markets all across the globe -- from Europe to Asia -- felt the pain, as equities tumbled. Japan's Nikkei 225 average fell by 700+ points at the opening bell (Japan's economy is second only to the United States.)

To cap off the day's bad news, Freddie Mac, America's #2 mortgage buyer, said that it will

"...cease buying subprime mortgages that have a high likelihood of excessive payment shock and possible foreclosure..."

Will #1 mortgage buyer Fannie Mae follow suit? We'll have to wait and see.


The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 28% (according to current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the May 9TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will be cut to 8.00% after the March 21ST FOMC monetary policy meeting: 12% (unlikely)

  • Current odds that the Prime Rate will be cut to 8.00% after the May 9TH FOMC monetary policy meeting: 28% (unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Wednesday, February 28, 2007: The Commerce Department releases the preliminary report on Gross Domestic Product for Q4, 2006.

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Friday, February 16, 2007

Probability of A Rate Cut for The August 7, 2007 FOMC Monetary Policy Meeting Now At 32%

The Dow Jones Industrial Average (DJIA) jumped 87.01 points on Wednesday, January 14, 2007. Why? Because Fed boss Ben Bernanke, in prepared remarks made before the U.S. Senate, made some encouraging statements about current and future expectations for inflation, encouraging because a rosy inflationary outlook means that the Fed is now very unlikely to raise rates in 2007, and the probability that the Fed will cut short-term interest rates later this year is now somewhat more likely.

Here are some clips from Dr. Bernanke's testimony:

"...Inflation pressures appear to have abated somewhat following a run-up during the first half of 2006. Overall inflation has fallen, in large part as a result of declines in the price of crude oil. Readings on core inflation--that is, inflation excluding the prices of food and energy--have improved modestly in recent months. Nevertheless, the core inflation rate remains somewhat elevated...

...It is encouraging that inflation expectations appear to have remained contained...

...The projections of the members of the Board of Governors and the presidents of the Federal Reserve Banks are for inflation to continue to ebb over this year and next..."

In New York trading, crude oil for future delivery finished at $59.39 per barrel this week, thanks to a return of normal winter temperatures to the northern reaches of the United States. Crude prices should abate once the warm weather returns, unless, like last year, geopolitical tensions and demand from energy-hungry nations like China cause prices to spike to $70+ per barrel. Inflation in the USA: as usual, is all about the light and sweet stuff.

Other factors contributing to the increased likelihood of a rate cut later this year:

  • Prime mortgages are doing just fine, but, unfortunately, subprime mortgages aren't faring as well. Foreclosures and delinquencies are putting some downward pressure on the already slumping housing sector. Here's a clip from a press release issued by HSBC on February 7, 2007:

    "...The impact of slowing house price growth is being reflected in accelerated delinquency trends across the US sub-prime mortgage market, particularly in the more recent loans, as the absence of equity appreciation is reducing refinancing options. Slower prepayment speeds are also highlighting the likely impact on delinquency of higher contractual payment obligations as adjustable rate mortgages reset over the next few years from their original lower rates.

    We have reviewed critically the impact of these factors in determining the appropriate level of provisioning at 31 December 2006 against the Mortgage Services loan book. We have taken account of the most recent trends in delinquency and loss severity and projected the probable effects of re-setting interest rates on adjustable rate mortgages, in particular in respect of second lien mortgages. It is clear that the level of loan impairment provisions to be accounted for as at the end of 2006 in respect of Mortgage Services operations will be higher than is reflected in current market estimates..."

    NB: Check out how home equity rates spiked when HSBC shared the bad news.

  • Earlier today, the Commerce Department reported that there were 1,408,000 housing starts last month, a 14.3% decline from December, 2006, and a 37.8% decline from a year ago (fewer new homes on the market could actually end up helping the housing sector, as inventories are already quite high.)

  • The Labor Department today reported that wholesale prices -- a.k.a. the Producer Price Index -- fell by 0.6% last month. On Thursday, the Labor Department reported that import prices fell by 1.2%.

  • On Thursday, the Federal Reserve reported that U.S. industrial production fell by 0.5% (economists were expecting a drop of about 0.1%.)

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 32% (according to current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the August 7TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the March 21ST and May 9TH FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to
    8.00% on June 28TH, 2007: 14% (unlikely)

  • Current odds that the Prime Rate will be cut to
    8.00% on August 7TH, 2007: 32% (somewhat unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Wednesday, February 21, 2007: Labor Department releases the Consumer Price Index (CPI) report for January, 2007.

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Wednesday, January 31, 2007

First FOMC Meeting of 2007 Adjourned: The Prime Rate Remains at 8.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned the first monetary policy meeting of 2007, and, in keeping with the latest forecast, the FOMC elected to leave short-term interest rates at their current level. Therefore, the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street Journal® Prime Rate (also known as the U.S. or national Prime Rate) will remain at the current 8.25%.

Here's a clip from the press release that was issued by the FOMC earlier this afternoon:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.

The Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh."

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 4% (according to current pricing on contracts) that the FOMC will vote to lower the benchmark Fed Funds Target Rate by 25 basis points at the June 28TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the March 21ST and May 9TH FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to
    8.00% on June 28TH, 2007: 4% (very unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic reports:

  • Friday, February 2, 2007: The Labor Department releases the Employment Situation report for January, 2007.

  • Friday, February 16, 2007: Labor Department releases the Producer Price Index (PPI) report for January, 2007.

  • Wednesday, February 21, 2007: Labor Department releases the Consumer Price Index (CPI) report for January, 2007.

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Friday, January 26, 2007

Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 2%

The Federal Open Market Committee (FOMC) is set to convene their first monetary policy meeting of 2007 on Tuesday; it's a two-day meeting, so they'll announce their decision about interest rates on Wednesday (January 31.)

What do we know right now? We know that the Fed won't tamper with interest rates next week, so, after next week's FOMC meeting, the national Prime Rate will remain at the current 8.25%. At this point, it is also very likely that the Fed will leave interest rates alone at the second FOMC meeting of 2007, which is set to take place on March 21ST.

The probability that the Fed will cut rates at the end of June dropped to 2% today after investors had a chance to digest reports on housing and durable goods orders:

  • The data in the December Existing Home Sales report (released yesterday) were mixed: though inventories were lower and prices showed signs of stabilizing, on a month-to-month basis, existing homes sales declined by 0.8%. Furthermore, on a year-to-year basis (2005-2006), existing home sales declined by 8.4% (2005 was the stronger year on record for existing home sales @ 7,075,000.)

  • The December New Homes Sales numbers were quite positive, with a month-to-month increase of around 4.8%, and inventories dropped from 549,000 homes to 539,000. However, the positive month-to-month numbers were tempered by the year-to-year stats: between 2005 and 2006, new home sales fell by 17.3%.

  • Good news from the manufacturing sector: December Durable Goods Orders were up by 3.1% last month. However, this news was tempered by demoralizing news from the auto industry: Ford Motor recently reported that 2006 was the worst year on record for the company -- a loss of $12.7 billion (that's right: billion.) 2006 was also a bad year for both DaimlerChrysler and General Motors: both companies are expected to report a significant loss for '06.

The Fed will cut interest rates later this year only if the U.S. economy needs the boost. What's the prognosis for the U.S. economy? Judging by the money on Wall Street, it's not too bad. When investors are feeling good about the economy's future, they tend to invest less in U.S. treasuries and more in stocks. As demand for government notes declines, the yield on those notes rises. Today, the yield on the benchmark 10-year treasury note rose to 4.879%. About two months ago -- on November 24, 2006 -- the yield on the ten-year note was 4.548.

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 2% (according to current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the June 28TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31ST and March 21ST FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to
    8.00% on June 28TH, 2007: 2% (very unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned to this blog for the latest odds.

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Thursday, January 18, 2007

Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 12%

If you've been holding your breath in anticipation of a rate cut later this year, then you better have great health insurance. The likelihood of a rate cut for this year has been diminishing steadily over the past few months. And now, based on the latest economic numbers, the Fed is even less likely to lower short-term interest rates later this year.

There were some surprises in this week's economic reports:

  • Though consumer prices rose at a pace that economists were expecting last month, wholesale prices increased at a pace that was significantly higher than prognosticators were predicting. Bad news from the Fed's point of view, as many Federal Reserve officials have been and are still expressing concern about inflation. A (very) small minority of economists and investors are now predicting that the Fed may actually raise short-term interest rates by 25 basis points by the end of March in an effort to contain the inflation threat.

  • With plenty of new and preowned homes available for sale right now, economists were expecting around 1,590,000 housing starts last month. The actual figure was 1,642,000.

The Latest Odds

As of right now, Fed Funds Futures traders have odds at 12% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the June 28TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31ST and March 21ST FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to
    8.00% on June 28TH, 2007: 12% (unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned to this blog for the latest odds. Odds may experience a significant shift on the release of the following economic reports:

  • Thursday, January 25, 2007: The National Association of Realtors releases the Existing Home Sales report for December, 2006.

  • Friday, January 26, 2007: The Commerce Department releases the New Home Sales report for December, 2006.

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Friday, January 05, 2007

Rate Cut for The March 21, 2007 FOMC Monetary Policy Meeting Now Very Unlikely On Release of December Jobs Report

Earlier today, the Department of Labor's Bureau of Labor Statistics released the Employment Situation Report for December, 2006. The December jobs report can be summed up in one word: strong. According to the Labor Department, a healthy 167,000 new jobs were added to U.S. payrolls last month (Wall Street forecasters were expecting around 100,000 new jobs), and the unemployment rate held steady at an economy-friendly 4.5%.

2006 was a good year from a jobs perspective: for the year, the unemployment rate dropped from 4.9% to 4.5%.

With the all-important U.S. employment situation looking favorable, the Fed is now less likely to lower interest rates before mid-2007.


The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 6% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will opt to lower the benchmark Federal Funds Target Rate by 25 basis points at the March 21ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31ST FOMC monetary policy meeting.

  • Current odds that the Prime Rate will be cut to
    8.00% on March 21ST, 2007: 6% (very unlikely)

  • Current odds that the Prime Rate will be cut to
    8.00% by June 28TH, 2007: 52% (on the fence)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned to this weblog for the latest odds.

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Wednesday, January 03, 2007

FOMC Minutes Released: Fed Still Concerned About Inflation

Earlier today, the Federal Reserve released the minutes from the December 12 FOMC monetary policy meeting: Despite clear sings that inflation is slowing, Fed officials were still quite concerned about inflation at last month's meeting.

The following are clips from the minutes released today:

"...In their discussion of the economic situation and outlook, meeting participants noted that their assessments of the medium-term prospects for economic growth and inflation were little changed from the previous meeting..."

"...In their discussion of the major sectors of the economy, participants noted that developments in the housing market continued to weigh heavily on economic activity. Housing starts and permits for new construction had dropped sharply in October, and contacts in the building sector reported that construction firms were continuing to cancel options on land purchases. However, there were some indications that home sales might be starting to stabilize, aided by a marked slowing in the rate of increase of house prices and a decline in mortgage rates in recent months. Several participants also noted that a range of non-price incentives and concessions were being offered by construction firms to bolster sales. But even if home purchases had begun to level off, residential investment was likely to fall further in coming quarters as homebuilders sought to reduce their backlogs of unsold homes..."

"...All meeting participants remained concerned about the outlook for inflation. Although readings on core inflation had improved modestly since the spring, nearly all participants viewed core inflation as uncomfortably high and stressed the importance of further moderation. Participants expected core inflation to edge lower over time, in part as the pass-through of higher prices for energy and other commodities ran its course and as the moderate growth in aggregate demand likely led to a modest easing of pressures on resources. Some participants also highlighted the impact that movements in the prices of individual components of the price index, such as owners' equivalent rent and medical costs, could have on near-term readings on core inflation. More generally, participants stressed there was considerable uncertainty as to the probable pace and extent of the moderation in core inflation and that the risks around this desired downward path remained to the upside. Moreover, participants expressed concern that a failure of inflation to moderate as expected could entail significant costs if an upward drift in inflation expectations ensued..."

"... The outlook for economic growth and inflation was thought to have changed relatively little since the previous meeting..."

The Latest Odds

Of course, investors reacted to this week's housing news. As of right now, the folks who trade in Federal Funds Futures have odds at around 16% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will opt to lower the benchmark Federal Funds Target Rate by 25 basis points at the March 21ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31ST FOMC monetary policy meeting.

  • Current odds that the Prime Rate will be cut to 8.00% at the
    March 21ST, 2007 FOMC monetary policy meeting: 16% (unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned to this blog for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Friday, January 5, 2007: The Labor Department releases the Employment Situation report for December, 2006.

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Friday, December 29, 2006

Probability of A Rate Cut for The March 21, 2007 FOMC Monetary Policy Meeting Drops to 10% On Encouraging Housing Data

The current national Prime Rate (WSJ Prime Rate) is 8.25%: get used to it!

Bottom line: the Fed will only lower interest rates next year if the U.S. economy needs a helping hand.

Right now, the nation's housing sector is arguably the biggest cause for concern. But this week's data related to the housing market was encouraging: both new and existing home sales showed improvement in November. Of course, it's really too soon to celebrate, because when the November housing numbers are compared to the numbers from a year ago, it's still quite clear that a lot more buying/selling activity will have to happen in the coming months before real estate agents can stop holding their collective breath.

In light of the latest housing numbers, the Fed is now less likely to lower interest rates before the third quarter of 2007. Contributing to the decreased likelihood of a rate cut for early 2007: The Conference Board's Consumer Confidence Index jumped from 102.9 last month to 109.0 for December '06.

  • Good news for home shoppers and investors: for both new and existing homes, inventories -- the number of homes on the market -- are still high, and prices are quite stagnant. Furthermore, foreclosures are likely to rise in the new year (it's really important to understand how Adjustable Rate Mortgages (ARM's) and Payment-Option Mortgages work!)

The Latest Odds

Of course, investors reacted to this week's housing news. As of right now, the folks who trade in Federal Funds Futures have odds at around 10% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will elect to lower the benchmark Federal Funds Target Rate by 25 basis points at the March 21ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31ST FOMC monetary policy meeting.

  • Current odds that the Prime Rate will be cut to 8.00% at the
    March 21ST, 2007 FOMC monetary policy meeting: 10% (very unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Federal Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Federal Funds Target Rate -- are continually changing, so stay tuned to this blog for the latest odds.

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Friday, December 22, 2006

Probability of A Rate Cut for The March 21, 2007 FOMC Monetary Policy Meeting Drops to 17%

If you're happy with the current U.S. Prime Rate level -- 8.25% -- then we have good news for you: it's not budging any time soon.

A number of key economic reports were released by the government this past week, including Housing Starts, PPI, GDP Final, Leading Economic Indicators, Durable Goods Orders, Consumer Sentiment, Consumer Spending, and the Philadelphia Fed's Business Outlook Survey. The economic picture is still mixed, which is nothing to get excited about, but, on the positive side, no one is predicting economic disaster for 2007: many economists and academics are forecasting that the U.S. economy will expand by about 3.0% next year. Of course, moderate growth is good news from a price stability perspective, and it should also translate to short-term interest rate stability.

Bottom line: if the Fed does decide to cut interest rates next year, it's not likely to happen before the third quarter of 2007.

Right now, the biggest drags on the U.S. economy are manufacturing and housing:

  • Bad news out this week, from a manufacturing perspective : the folks at Toyota are planning to produce an astonishing 9,420,000 vehicles in 2007; General Motors may end up as the global #2 auto manufacturer if the top brass at Toyota realize their 2007 goal.

  • Bad news out this week, from a housing perspective: According to the final, third-quarter GDP report released yesterday, residential fixed investment fell by 18.7% during Q3, 2006; in the preliminary GDP report released last month, the figure was reported at 18.0%. Furthermore, the Center for Responsible Lending recently forecast that approximately 1 out of every 5 subprime mortgages originated during the past 2 years will end up in foreclosure, and losses for subprime mortgage holders may climb as high as $164 billion over the next several years -- mainly in the form of lost home equity.

The Latest Odds

Of course, investors have reacted to this week's news and economic reports. As of right now, the folks who trade in Federal Funds Futures have odds at around 17% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will elect to lower the benchmark Federal Funds Target Rate by 25 basis points at the March 21ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31ST FOMC monetary policy meeting.

  • Current odds that the Prime Rate will be cut to 8.00% at the
    March 21ST, 2007 FOMC monetary policy meeting: 17% (unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Federal Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Federal Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift after the release of the following economic reports:

  • Wednesday, December 27, 2006: The Commerce Department releases their report on November New Home Sales.

  • Wednesday, December 28, 2006: The National Association of Realtors® releases the November Existing Home Sales report.

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Tuesday, December 12, 2006

Fed Leaves Short-Term Rates Alone: Prime Rate Remains at 8.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned the eighth and last monetary policy meeting of 2006, and, in keeping with the latest odds and predictions, the FOMC voted to leave short-term interest rates at their current level. Therefore, the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street Journal® Prime Rate (also known as the U.S. or Fed Prime Rate) will remain at the current 8.25%.

The Fed has voted to keep short-term rates unchanged four times in a row now, and, for the fourth FOMC meeting in a row, Fifth District Federal Reserve Bank President Dr. Jeffrey M. Lacker was the sole dissenter: Dr. Lacker once again voted for a 25 basis point (0.25 percentage point) increase for the Fed Funds Target Rate.

Here's a clip from the press release that was issued by the FOMC earlier this afternoon:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters.

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting."

The Latest Odds: What's Ahead for The Prime Rate?

As of right now, Fed Funds Futures traders have odds at around 28% (according to current pricing on contracts) that the FOMC will elect to lower the Federal Funds Target Rate by 25 basis points at the March 21ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31ST FOMC monetary policy meeting.

  • Current odds that the Prime Rate will be cut to
    8.00% on March 21ST, 2007: 28% (not likely)

  • NB: Prime Rate = (The Fed Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned to this blog for the latest odds.

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Thursday, November 30, 2006

Probability of A Rate Cut for The March 21, 2007 FOMC Monetary Policy Meeting Is Now At 79%

The U.S. economy is still sending mixed signals. For example, Gross Domestic Product (GDP) for the third-quarter was recently revised up from 1.6% to 2.2%, and the most recent Beige Book report from the Fed indicates that most of the country is still enjoying moderate growth. On the flip side, consumer confidence continues on a downward trend, and orders for durable goods fell by 8.3% last month. Furthermore, we may still have to worry about inflation. Here's a clip from a recent speech made by Fed boss Ben Bernanke before the National Italian American Foundation in New York:

"...Looking forward, core inflation seems likely to moderate gradually over the next year or so. Some of the factors that pushed up core inflation in the recent past--in particular, energy prices and shelter costs--appear likely to be more neutral in the coming year, and inflation expectations remain contained. Moreover, if, as seems most probable, the economy grows at a rate modestly below its potential for a time, pressures on resource utilization should ease a bit.

However, as with the outlook for economic activity, there are substantial uncertainties about the inflation forecast. In the case of inflation, the risks to the forecast seem primarily to the upside. Given the current level of inflation, a failure of inflation to moderate as expected would be especially troublesome..."

Housing Sector Continues to Slide

More evidence that the housing market is still sliding came in this week:

  • Tuesday's Existing Home Sales report for October, '06 showed that preowned-home sales enjoyed a modest gain last month, and the sales numbers also beat economists' expectations. But the median sale price on a used home was down by a very significant 3.5% when compared to used-home sales from October, 2005.

  • Wednesday's New Home Sales report for October, '06 showed that sales of newly-built homes are down when compared to September, 2006, and are down significantly when compared to new home sales from September, 2005.

When will the housing correction bottom out? No one knows for sure (of course, if you're in the market for a new home, then the current housing situation is good news, especially because the inventory of new and existing homes continues to rise, and mortgage rates are still consumer-friendly.)


10-Years Treasury Note Yield vs. The Federal Funds Target Rate

President Bush's economic advisers recently lowered their expectations for GDP growth next year: the 2007 GDP forecast is 2.9% right now, whereas, back in June, the same group of advisers were predicting 3.6% growth for 2007. Basically, the forecast is for strong growth throughout the economy, except for the U.S. housing market.

2.9% is a decent number, especially if inflation remains tame. So maybe Bernanke and his Fed colleagues have raised rates to just the right level, i.e. the neutral rate (the neutral rate is a Fed Funds Target Rate that neither stimulates nor inhibits U.S. economic growth, and is the rate that's associated with a stable U.S. economy.)

Or, maybe not.

Maybe today's Fed Funds Target Rate of 5.25% is a bit above neutral, which would mean that the Fed may elect to lower the Fed Funds Target to 5% some time next year. That's what investors are thinking.

When investors foresee an economic slowdown ahead, they tend to move their money from stocks to the relative safety of government treasuries. As the demand for e.g. 10-year treasury notes rises, the yield on the 10-year note -- i.e. the interest paid to the investor -- falls (and vice versa.)

Treasury yields are great indicators of where the economy is headed, especially when the yield on the ten-year note is compared to the Federal Funds Target Rate. If the yield on the 10-year note is trending lower than the Fed Funds Rate Target, then it's a pretty safe bet that the economy will be slowing in the coming months. The difference between the Fed Funds Target Rate and the 10-year treasury yield is known as the "spread."

The last time the Fed started cutting interest rates (so as to spur economic growth) was on January 3, 2001; on that day, the Fed Funds Target Rate was 6%, and the yield on the 10-year treasury note was 4.92%. That's a spread of 1.08 percentage points.

Right now, the spread is 0.792 percentage points, and it's been widening ever since June 29, 2006; June 29 was the date of the last Fed rate hike. Here's a chart to demonstrate the current trend:


Federal Funds Target Rate vs. Yield on The Ten-Year Treasury Note: June 29, 2006 through November 30, 2006



If the gap between the 10-year treasury note yield and the Fed Funds Target Rate continues to widen, then the U.S. economy is more likely to cool in the coming months, which, in turn, would make it more likely that the Fed will elect to lower interest rates in 2007.


The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at around 79% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will elect to lower the benchmark Fed Funds Target Rate by 25 basis points at the March 21ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the December 12TH and January 31ST FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to
    8.00% on March 21ST, 2007: 79% (somewhat likely)

  • NB: Prime Rate = (The Fed Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Friday, December 8, 2006: The Labor Department releases the Employment Situation report for November.

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Wednesday, October 25, 2006

Fed Votes To Leave Interest Rates Alone: Prime Rate Remains at 8.25%

In line with the latest predictions, the Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned their seventh monetary policy meeting of 2006, and elected to leave interest rates at their present level. Therefore, the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street Journal® Prime Rate (the nationwide Prime Rate) will remain at the current 8.25%.

The Fed has voted to leave interest rates unchanged 3 times in a row now, and Fifth District Federal Reserve Bank President Dr. Jeffrey M. Lacker has dissented 3 times in a row as well, voting once again for a 25 basis point (0.25 percentage point) increase for the Fed Funds Target Rate. A suitable moniker for Dr. Lacker: Jeffrey "Inflation Hawk" Lacker.


Prime Rate Forecast: Predictions for the Prime Rate

The Fed is still counting on the cooling economy to help douse the flames of inflation moving forward, so at the December 12 monetary policy meeting -- the last of 2006 -- the group is likely to repeat today's inaction and leave interest rates at their current level.

More evidence that the U.S. economy is waning came in today. The National Association of Realtors® released the September, 2006 Existing Home Sales report earlier this morning: existing home sales fell by 1.9% to 6,180,000 units last month. That's 14.2% lower than the September, 2005 level.

As of right now, the investors who trade in Fed Funds Futures have odds at around 10% (according to current pricing on contracts) that the FOMC will elect to raise the benchmark Fed Funds Target Rate by 25 basis points at the January 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the December 12TH FOMC monetary policy meeting.

  • Current odds that the Prime Rate will rise
    to 8.50% on January 31ST, 2007: 10% (unlikely)

  • NB: Prime Rate = (The Fed Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts--widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate--are continually changing, so stay tuned to this blog for the latest odds. Odds may experience a significant shift when the Fed releases the minutes from today's policy meeting on November 14TH. (TIP: type the easy-to-remember URL www.PrimeRatePredictions.com into your web browser as a shortcut to this blog, or, if you prefer, www.PrimeRateForecast.com).


Here's a clip from the press release that was issued by the FOMC this afternoon:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting."

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Wednesday, September 20, 2006

No Action on Interest Rates Today: Prime Rate Remains at 8.25%

In keeping with predictions, the Federal Open Market Committee (FOMC) of the Federal Reserve met today and decided to leave interest rates at their present level. Therefore, the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street Journal® Prime Rate (the U.S. Prime Rate) will remain at the current 8.25%.

Once again, today's FOMC vote wasn't unanimous: as he did at the August 8, 2006 FOMC monetary policy meeting, Fifth District Federal Reserve Bank President Dr. Jeffrey M. Lacker did not vote with the pack, instead voting for a 25 basis point increase for the Fed Funds Target Rate today.


Prime Rate Forecast: What's Ahead for the Prime Rate?

The one-two punch of a cooling U.S. economy and easing crude oil prices should keep inflation on the ropes moving forward, so most experts are predicting that the Fed will leave interest rates at their present level for the rest of 2006. In fact, some economists and academics are predicting that the Fed will start to bring interest rates down as early as Q1, 2007.

As of right now, the investors who trade in Fed Funds Futures have odds at about 6% (according to current pricing on contracts) that the FOMC will elect to raise the benchmark Fed Funds Target Rate by 25 basis points at the October 24TH monetary policy meeting.


Simple Summary of the latest Prime Rate Predictions:

  • Current odds that the Prime Rate will rise
    to 8.50% on October 24TH, 2006: 6%

  • NB: Prime Rate = (The Fed Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts--widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate--are continually changing, so stay tuned for the latest odds (TIP: type the URL www.PrimeRatePredictions.com into your web browser as a shortcut to this blog, or, if you prefer, www.PrimeRateForecast.com).


Here's a clip from the press release that was issued by the FOMC this afternoon:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.

Readings on core inflation have been elevated, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting."

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Tuesday, August 08, 2006

FOMC Elects to Pause Raising Rates: Prime Rate Remains at 8.25%

Looks like the most recent predictions were right on the mark: the Federal Open Market Committee (FOMC) of the Federal Reserve met today and decided to leave interest rates alone. That means that the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street Journal® Prime Rate (the national Prime Rate) will remain at 8.25%.

Today's FOMC vote wasn't unanimous: Fifth District Federal Reserve Bank President Jeffrey M. Lacker wanted another 25 basis point hike for the Fed Funds Target Rate today.


Prime Rate Prediction: What's Ahead for the Prime Rate?

The Fed is still worried about inflation, but the FOMC elected to leave rates alone. Why? Yes, the Fed is very keen on controlling inflation, but they also don't want to raise interest rates at a pace that's going to snuff out economic growth and push the U.S. economy into that dark closet called recession. This pause will give the FOMC a chance to see if the 17 straight rate hikes instituted since the summer of 2004 were enough to get inflation under control. It's kinda' like cooking scrambled eggs: you want to turn off the heat before the eggs are done and let the heat from the pan finish the cooking job; keep the heat on for too long and you end up burning the eggs.

Many economists and investors feel that today's Fed action was a "pause" as opposed to a termination of the rate-raising regimen that began 2 years ago. If the economic reports (GDP, CPI, PPI, Employment Situation, etc.) released between now and the next FOMC meeting indicate that inflation still needs taming, then it's a pretty safe bet that the Fed will react by raising rates by at least 25 basis points on September 20TH. If inflation looks really bad then we may be in for a 50 basis point hike next month.

As of right now, the investors who trade in Fed Funds Futures have odds at about 33% (according to current pricing on contracts) that the FOMC will elect to raise the benchmark Fed Funds Target Rate by 25 basis points to 5.50% at the September 20TH, 2006 monetary policy meeting.


Simple Summary of the latest Prime Rate Predictions:

  • Current odds that the Prime Rate will rise
    to 8.50% on September 20TH, 2006: 33%

  • Current odds that the Prime Rate will rise
    to 8.50% by the end of the year: 53%

  • NB: Prime Rate = (The Fed Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts--widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate--are continually changing, so stay tuned to this blog for the latest odds (TIP: type the URL www.PrimeRatePredictions.com into your web browser as a shortcut to this blog, or, if you prefer, www.PrimeRateForecast.com).


Here's a clip from the press release that was issued by the FOMC this afternoon:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Readings on core inflation have been elevated in recent months, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting."

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Thursday, June 29, 2006

Prime Rate Increase Today: The Prime Rate Is Now 8.25%

Ladies and gents: borrowing just got more expensive. In accordance with all the reliable interest rate predictions and forecasts, the Federal Open Market Committee (FOMC) of The Federal Reserve has just raised its target for the benchmark Federal Funds Rate by 25 basis points (0.25 percentage point) to 5.25%. Therefore, as of this afternoon, the de facto Wall Street Journal® Prime Rate (the U.S. Prime Rate) is now 8.25%. Many American banks have already issued a press release announcing that their prime lending rate has increased from 8.00% to 8.25%, including:

  • The Bank of America*
  • HSBC*
  • Northern Trust*
  • PNC*
  • Harris N.A.*
  • Dollar Bank*
  • National City*
  • Comerica Bank*
  • Wells Fargo*
  • KeyCorp*
  • U.S. Bancorp*
  • M&T Bank*
  • SunTrust*
  • Wachovia*
  • Sky Financial*

The Fed has raised it's target for the Fed Funds Rate by a quarter-point 17 times in a row since June, 2004, and we may be in for another quarter-point increase after the FOMC adjourns their monetary policy meeting on August 8, if, at that time, the Fed isn't comfortable with the pace of inflation.


Prime Rate Prediction: Forecast for The Prime Rate

According to the latest and most authoritative data from the government, U.S. GDP rose by a strong 5.6% in the first-quarter. Nevertheless, consistently high crude oil prices and the higher cost of borrowing have had a cooling effect on the U.S. economy, and this means that the Fed is somewhat less likely to raise rates again in the future. Investors on Wall Street were quite pleased with the language in today's press release, as evidenced by the strong gains made by the 3 major indices today, with the Dow Jones Industrial Average (DJIA) gaining a healthy 217 points.

As of right now, Fed Funds Futures traders have odds at about 62% (according to current pricing on contracts) that the FOMC will elect to raise the benchmark Fed Funds Target Rate by another 25 basis points to 5.50% at the August 8 monetary policy meeting. Prior to today's rate increase, the odds on another quarter-point rate hike on August 8TH were at about 83%.

Simple Summary of the latest Prime Rate predictions:

  • Current odds that the Prime Rate will rise
    to 8.50% on August 8, 2006: 62%

The odds related to Fed Funds Futures contracts--widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate--are continually changing, so stay tuned for the latest odds, especially when The FOMC releases the minutes from today's meeting, which should happen on July 20TH, 2006.


Here's a snippet from the press release that was issued by the Fed earlier this afternoon:

"The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5-1/4 percent.

Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.

Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Jeffrey M. Lacker; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen."

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Wednesday, May 10, 2006

Prime Rate Increase Today: U.S. Prime Rate Is Now 8.00%

If you have plans to access money in the near future via an Adjustable Rate Mortgage (ARM), a car loan or a shiny new variable rate credit card, then we have some news that you should know about: in accordance with all the reliable interest rate predictions and forecasts, the Federal Open Market Committee (FOMC) of The Federal Reserve has just raised its target for the benchmark Federal Funds Rate by 25 basis points (0.25 percentage point) to 5.00%. Therefore, as of this afternoon, the de facto Wall Street Journal® Prime Rate (the U.S. Prime Rate) is now 8.00%. Many American banks have already issued a press release announcing that their prime lending rate has increased from 7.75% to 8.00%, including:

  • The Bank of America*
  • Northern Trust*
  • PNC*
  • Harris N.A.*
  • Dollar Bank*
  • National City*
  • Comerica Bank*
  • Wells Fargo*
  • KeyCorp*
  • U.S. Bancorp*
  • M&T Bank*
  • SunTrust*
  • Wachovia*
  • Sky Financial*

The Fed has raised it's target for the Fed Funds Rate 16 times in a row since June, 2004.


Prime Rate Prediction: Forecast for The Prime Rate

The economy has been moving ahead at a strong pace since the start of 2006, so predictions have been quite easy to make, as economists, academics and investors knew that the Fed would raise rates in order to control inflation. Now that certain signals are indicating that the economy may be slowing down, predictions about the Fed's next move related to interest rates will be a bit trickier.

As of right now, Fed Funds Futures traders have odds at about 42% (according to current pricing) that the FOMC will raise the benchmark Fed Funds Target Rate by another 25 basis points when the June 28-29 monetary policy meeting adjourns. Yesterday, Fed Funds Futures traders had odds at 40%.

The odds related to Fed Funds Futures trade are continually changing, so stay tuned for the latest odds, especially when The FOMC releases the minutes from today's meeting, which should happen on May 31st, 2006.


Here's a snippet from the press release that was issued by the Fed moments ago:

"The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5 percent.

Economic growth has been quite strong so far this year. The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.

The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen."

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Tuesday, April 18, 2006

Minutes From The March 28-29, 2006 FOMC Meeting Were Released Today; Prime Rate Increase Likely on May 10, 2006

The minutes from the March 28-29, 2006 Federal Open Market Committee (FOMC) meeting were released earlier today. A couple of interesting snippets from those minutes can be found below:

"...In the Committee's discussion of monetary policy for the intermeeting period, all members favored raising the target federal funds rate 25 basis points to 4Âľ percent at this meeting. The economy seemed to be on track to grow near a sustainable pace with core inflation remaining close to recent readings against a backdrop of financial conditions embodying an expectation of some tightening. Since the available indicators showed that the economy could well be producing in the neighborhood of its sustainable potential and that aggregate demand remained strong, keeping rates unchanged would run an unacceptable risk of rising inflation. Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy. However, members also recognized that in current circumstances, checking upside risks to inflation was important to sustaining good economic performance. The need for further policy firming would be determined by the implications of incoming information for future activity and inflation..."

"...With regard to the Committee's announcement to be released after the meeting, members expressed some difference in views about the appropriate level of detail to include in the statement. In the end, they concurred that the statement should note that economic growth had rebounded in the current quarter but that it appeared likely to moderate to a more sustainable pace in coming quarters. Policymakers agreed that the announcement should also highlight the favorable outlook for inflation and summarize their reasons for that assessment, but that it should reiterate that possible increases in resource utilization, along with elevated levels of commodity and energy prices, had the potential to add to inflation pressures. Changes in the sentence on the balance of risks to the Committee's objectives were discussed. Several members were concerned that market participants might not fully appreciate the extent to which future policy action will depend on incoming economic data, especially when an end to the tightening process seems likely to be near. Some members expressed concern that retention of the phrase "some further policy firming may be needed to keep the risks...roughly in balance" could be misconstrued as suggesting that the Committee thought that several further tightening steps were likely to be necessary. Nonetheless, all concurred that the current risk assessment could be retained at this meeting..."
Interesting notes, notes that many on Wall Street were happy to read, as the Dow Jones Industrial Average (DJIA) gained a very healthy 194 points today. Investors responded to today's release with bullishness because they divined the language in the Fed minutes as a hint that the Fed may end their rate raising regimen at the next FOMC meeting, which is scheduled to take place on May 10th, 2006.

As we move into the second quarter, the economy still appears to be advancing with a full head of steam. Unemployment is low--the U.S. has a jobless rate that is the envy of many nations in the industrialized world--and the latest government reports on the U.S. economy indicate that inflation may not be a serious problem.

Of course, the ever increasing cost for a barrel of the light sweet stuff (crude is currently @ $72 per barrel in New York, and rising) is still threatening to "pass through" and cause general price increases for both consumers and producers--inflation--and this may prompt the Fed to raise their benchmark Fed Funds Rate beyond 5% later this year. Other issues that are influencing the cost of crude oil include:

  • Political tensions in Nigeria, Iran and Iraq (Iraq is pumping less oil today than it was before the war.)

  • The summer driving season is upon us, which means increased demand for fuel.

  • The conversion from MTBE reformulated gasoline (RFG) to ethanol RFG in certain regions of the U.S. including the East Coast and major metropolitan areas in Texas.

The Latest Prime Rate Predictions

The investors who trade in Fed Funds Futures are now predicting (according to current pricing) a 100% chance that The FOMC will raise The Fed Funds Target Rate by another 25 basis points (0.25 percentage points) when The FOMC convenes their third monetary policy meeting for 2006, which is scheduled to take place on May 10th, 2006. A quarter point increase to the Fed Funds Target Rate would, of course, translate to a nationwide Prime Rate increase from the current 7.75% to 8.00%.

The fourth FOMC meeting for 2006 is set to convene on June 28-29, 2006, and Fed Funds Futures traders are now predicting (according to current pricing) a 30% chance that The FOMC will raise The Fed Funds Rate by another 0.25 percentage points when the June 28-29 meeting adjourns.

The odds that have been referenced in this blog entry change on a regular basis, so stay tuned for the latest odds.


The current U.S. Prime Rate (Wall Street Journal® Prime Rate) is 7.75%, and a jump to 8.00% is very likely after the FOMC adjourns on May 10th, 2006.

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Tuesday, March 28, 2006

Prime Rate Increase Today: U.S. Prime Rate Is Now 7.75%

Today's rate increase by The Fed comes as no surprise to the business, banking, academic and investment communities, as today's 25 basis point (0.25 percentage point) increase to The Federal Funds Target Rate was fully expected.

The Federal Open Market Committee (FOMC) of The Federal Reserve today voted to raise their Fed Funds Target Rate to 4.75%. Therefore, as of this afternoon, the de facto Wall Street Journal® Prime Rate (the U.S. Prime Rate) is now 7.75%, the highest it's been in 5 years. Many American banks have already issued a press release announcing that their prime lending rate has increased from 7.5% to 7.75%, including:

  • The Bank of America*
  • The Bank of New York*
  • PNC*
  • Comerica Bank*
  • Wells Fargo*
  • Wachovia*
  • KeyCorp*
  • SunTrust*
  • U.S. Bancorp*
  • Sky Financial Group*
  • M&T Bank*

What's Ahead for the Prime Rate

Low unemployment coupled with strong economic growth and high energy prices are all placing inflationary pressure on the nation's economy. High energy costs--and, of course, we are talking about crude oil here--continue to threaten to "pass through" and cause a general price increases for both consumers and producers. Right now, NYMEX crude oil for future delivery is at a staggering $65.94 per barrel, and no one knows when the political tensions in the Middle East and Africa are going to simmer down.

Today was Dr. Ben Bernanke's debut as the FOMC boss, so rate watchers, economists, academics, investors--anyone and everyone with an interest in the U.S. economy--are all scrutinizing the press release that was issued by The Fed today with much fervor. Many rate watchers are going to be pleased about the wording in today's release, as the comments contain language that provides some useful insight as to future interest rate decisions that will be made by the FOMC:

"The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives."

Yup, good stuff, because the statement about future policy is virtually identical to the one that can be found in the January 31, 2006 FOMC press release when Alan Greenspan was still calling the shots, and I think lots of folks like the idea that Bernanke is probably making an effort to emulate Dr. Greenspan's approach to U.S. economic stewardship.

We can tell by the above language that if the economy continues to move ahead at a healthy pace, and other factors like low unemployment and high energy prices continue to place inflationary pressure on the economy, then we should expect another 25 basis point increase to the Federal Funds Target Rate after the FOMC adjourns on May 10th, 2006; a Fed Funds Rate of 5% after May 10th, 2006, would translate to a national Prime Rate of 8%, because the Prime Rate can be expressed as:

U.S. Prime Rate = The Fed Funds Rate + 3


Prime Rate Prediction: The Latest Odds from Fed Funds Futures Traders

The investors who trade in Federal Funds Futures have shifted the odds--according to current pricing--of another quarter point hike to the Fed Funds Rate following today's statement by The FOMC: odds of another 0.25 percentage point increase have gone from 76% to 90%. So, according to current pricing on Federal Funds Futures, we should expect a U.S. Prime Rate of 8% after the FOMC adjourns on May10th, 2006.

The odds related to Fed Funds Futures trade are continually changing, so stay tuned for the latest odds, especially when The FOMC releases the minutes from today's meeting, which should happen on April 18th, 2006.


Here's a snippet from the press release that was issued by The Fed today:

"The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-3/4 percent.

The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace. As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.

The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen."

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Tuesday, January 31, 2006

Prime Rate Increase Today: The WSJ Prime Rate Is Now 7.5%

As expected, The Federal Open Market Committee (FOMC) of The Federal Reserve Board has just voted to raise The Federal Funds Rate by 25 basis points (0.25 percentage points) to 4.5%. This means that the de facto Wall Street Journal Prime Rate (the U.S. Prime Rate) is now 7.5%. Many American banks have already released statements announcing that their prime lending rate is now 7.5%, including:

  • The Bank of America*
  • The Bank of New York*
  • Wells Fargo*
  • Wachovia*
  • KeyCorp*
  • SunTrust*
  • Colonial Bank*
  • Sky Financial Group*

Today's rate increase comes as no surprise to economists, bankers and rate watchers, as most have been predicting a quarter point increase from The Fed today. Today's Fed Funds Rate increase-- and subsequent prime rate increase--is the 14th straight bump to these key banking interest rates, and it looks like more rate increases are coming as the year progresses.

Prime Rate Predictions

According to the latest economic data, the economy is doing well, and if the economy continues to do well, then another rate increase is likely, as The Fed will try to cool things down in an effort to stave-off inflation. The Fed is also keenly interested in attaining what's called the "neutral rate" for the Federal Funds Rate: the neutral rate can be described as a Fed Funds Rate that neither encourages nor curtails U.S. economic growth. Most economist believe that with the current Fed Funds Rate of 4.5%, we aren't quite @ "neutral" yet, so at least one more 0.25 percentage point increase should be expected.

The majority of economists who responded to a recent poll are predicting that The Fed Funds Rate will be bumped up to 4.75% by the end of June, 2006, and that it will remain @ 4.75 for the rest of 2006. Since the prime rate can be expressed as:

U.S. Prime Rate = The Fed Funds Rate + 3

then, according to the latest predictions, the WSJ Prime Rate should hit 7.75% by mid-summer and stay @ 7.75% for the rest of the year.

A minority of the folks who deal in government securities that are associated with The Fed are predicting that The Fed will raise The Fed Funds Rate to 5% by the end of 2006.

Of course, there are many, continually shifting variables that have an effect on The Fed's interest rate strategy, foremost being inflation, but there are also many other important measures of the U.S. economy that The Fed watches closely. And let's not forget that a new Fed Chairman taking is over tomorrow--so prime rate predictions should always be viewed with a skeptical eye.

Alan Greenspan Exits As Ben Bernanke Is Confirmed As The New Fed Chairman

Alan Greenspan leaves his post as Fed Chairman today as a banking celebrity (there are even rock songs that invoke his name!) and it's no surprise if you think about it.

The economy is cyclical, so there will always be periods of economic growth, followed by periods of economic sluggishness, then growth again, and so on ad infinitum. As Chairman of The Federal Reserve Board, Dr. Greenspan was in charge of U.S. monetary policy during America's longest sustained economic expansion of the postwar period, and that is nothing to sneeze at. Greenspan should be proud of his accomplishments--no doubt--but we should also keep the other side of the coin in mind: how much credit can we bestow on Greenspan when in fact his only real power was controlling banking interest rates? Was the expansion of the 90's a bad thing, since e.g. many of those billion-dollar-burn-rate, dotcom companies ended up going nowhere? Did Greenspan & Co. set interest rates too low, creating a massive real estate bubble that will end up hurting American consumers in the long term? Did low interest rates help to turn Americans into borrow-crazy consumers with little or no savings?

I personally think that Alan Greenspan did a good job, especially the way he handled the country's banking situation after the 911 attacks. To put things into perspective, check out the way interest rates were going in the early 80's before Greenspan took over: not a pretty picture! The way I see it, Greenspan could have done much worse, and that is the bottom line.

Greenspan will now go back to economic consulting, which is what he was doing before going into public service; the latest (unconfirmed) buzz is that Greenspan's new consulting firm will be called Greenspan Associates. I think it's safe to write that, as a consultant, Greenspan will charge whatever he wants for his services, and he'll get it.

Ben Bernanke was confirmed to take over as The Fed Chairman today, and I wish him well; officially, Bernanke will take the helm tomorrow morning. Bernanke steps up to the plate with excellent credentials so I doubt that Americans have anything to worry about. Many would rather just clone Greenspan and give the facsimile two terms as Fed chief; just nervousness about a new face, that's all.

The next FOMC meeting--which will be the first with Ben Bernanke calling the shots--will take place on March 28, 2006, and, as of right now, most experts are predicting another 0.25 percentage point increase to The Fed Funds Rate (which would translate to a 0.25 percentage point increase to the WSJ Prime Rate.) Stay tuned to The Prime Rate Blog as I'll be posting the latest buzz about prime rate predictions between now and the end of March.

Here's a snippet from today's press release issued by The Fed:

"The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-1/2 percent.

Although recent economic data have been uneven, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.

The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Jack Guynn; Donald L. Kohn; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; and Janet L. Yellen."

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