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Prime Rate

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

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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