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Prime Rate

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

Saturday, December 29, 2007

Odds On A Rate Cut for the January 30 Monetary Policy Meeting Now at 90%

The odds that the Fed will cut short-term interest rates next month jumped to 90% on Friday, after news of dismal November new home sales. According to the Commerce Department, new home sales fell by 9.0% last month. Furthermore, the modest advance of new home sales during September and October were revised downward. Between November '06 and November '07, sales of new homes declined by 34.4%.

Nationwide, the median price of a shiny new home was $239,100 during November, while the average price was $293,300. The number of new homes for sale at the end of last month fell from 519,000 to 509,000.

The cost of a newly built home peaked back in March of this year, when the median price was $262,600, and the average was $329,400 (click here for historical prices.)

The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 90% (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: 90% (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, January 4, 2008: The Labor Department releases the December Employment Situation Report.

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