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Prime Rate

also known as the Fed, National, U.S. and WSJ Prime Rate

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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