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Prime Rate

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

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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