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Prime Rate

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

Thursday, January 24, 2008

Futures Market Still Certain Of Rate Cut for January 30; Odds On A 50 Basis Point Cut Now at 68%

Last Saturday, while most Wall Street economists were predicting that the Fed would cut rates by 50 basis points by January 30, the fed funds futures market was 72% certain that the Fed would cut by 75 basis points at or before the January 30 Federal Open Market Committee (FOMC) meeting. On Tuesday, we learned that the futures market had indeed nailed it, as usual. The Fed executed an intermeeting rate cut of 75 basis points, prompted by significant market losses in Asia and Europe on the Martin Luther King holiday.

The stock market has been looking healthier since Tuesday. The Dow Jones Industrial Average (DJIA) gained 108.44 points today, while the S&P 500 advanced by 13.47. Another positive piece of news: crude oil for future delivery is currently trading at $89.61 per barrel (crude closed at $97.91 on January 4, 2008.)

On the negative side, New York Spot Gold closed at $912.30 per ounce today, and the yield on the 10-Year Treasury Note closed at 3.64%. In other words: money is still moving to safe havens.

The news that has almost certainly been influencing the fed funds futures market the most today came from the housing sector. Earlier today, the National Association of RealtorsĀ® reported that sales of previously occupied homes fell by 2.2% last month, and sales were down by 22% from December '06 to December '07. The median price for a preowned home fell to $208,400, while the average price fell to $254.900 (preliminary data.) In the Northeast United States, the median price on a used home was down 8.9% for the December '06 to December '07 period.

The fed funds futures market is still 100% certain that the Fed will cut short-term rates by at least 25 basis points (0.25 percentage point) when the FOMC meets on January 30. As of right now, the market has odds at 68% that the Fed will cut short-term rates by 50 basis points, and current odds are at 32% that the Fed will opt instead for a 25 basis point cut on January 30.

Here's what these odds mean to all you hard working consumers out there: You can expect any loan that's tied to the WSJ Prime Rate (home equity lines of credit, variable-rate credit cards, business loans, personal loans, etc.) to be 1.00 percentage point lower by March (or April at the latest.) So if you have a variable-rate credit card that's indexed to Prime, and your current APR is 12%, you can look forward to your rate dropping to 11% within the next 2 months.

For those of you with a mortgage indexed to LIBOR, another Fed rate cut at the end of this month is great news for you too, because the LIBOR rates tend to move in tandem with the benchmark Fed Funds Target Rate.

If you've been patiently waiting for just the right time to borrow, then you may want to wait a little while longer. The current cycle of Fed rate cuts may continue after January. Stay tuned for the latest odds.

Summary of 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% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the January 30TH, 2008 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 January 30TH 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 constantly changing, so stay tuned for the latest odds.

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