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Prime Rate

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

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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