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Prime Rate

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

Sunday, January 27, 2008

Odds On A 50 Basis Point Cut for January 30 Now at 78%

The Fed will make its next decision on short-term interest rates on January 30, and as we approach that date, the odds from the fed funds futures market have, with increasing confidence, been predicting that the Fed will opt for a 50 basis point (0.50 percentage point) cut. The odds on a 50 basis point cut for the benchmark Fed Funds Target Rate now stand at 78%, and the remaining odds -- 22% -- are for a 25 basis point cut.

Let's have a quick look at what might have influenced the futures market recently.

Though both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index advanced on the week, both indexes are still down significantly since each peaked last fall. Since closing with all-time highs on October 9, 2007, the DJIA is now down 1,957.36 points (13.819%), while the S&P 500 is down 234.54 points (14.985%).

The yield on the benchmark 10-Year Treasury Note fell to 3.584%. For some perspective, the yield was 4.65% on October 9, 2007.

Also notable: New York Spot Gold closed at $910.50 per ounce on Friday.

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)

  • Current odds that the Prime Rate will be cut by 50 basis points at the January 30TH FOMC monetary policy meeting: 78% (more likely than unlikely)

  • 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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