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Prime Rate

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

Monday, December 31, 2007

Odds On A Rate Cut for the January 30 Monetary Policy Meeting Now at 94%

A mixed report on existing home sales caused the odds on a rate cut for next month to jump to 94% today. According to the National Association of Realtors¨, sales of previously occupied homes enjoyed a 0.4% increase last month. This positive news was, however, tempered by comparisons to years past. Between November '06 and November '07, sales of preowned homes were down 20%, while the median price fell by 3.3%. Here's a sampling of the median cost of a preowned home since November, 2005:

  • November 2005: $225,000

  • November 2006: $217,300

  • November 2007: $210,200 (preliminary data)

Nationwide, the inventory of preowned homes for sale fell from 4,433,000 to 4,273,000 units at the end of last month, which should help to stem the decline in prices.

Click here for historical prices and a chart.


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 94% (as implied by current pricing on contracts) that the Federal Open Market Committee (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: 94% (very 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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