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Prime Rate

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

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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