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Prime Rate

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

Tuesday, January 29, 2008

Odds on The Fed Cutting by 50 Basis Points Tomorrow at 76% Despite Encouraging Report on Orders for Durable Goods

Some positive news from the economic front today: the Commerce Department reported that new orders for durable, manufactured goods -- products built to last 3 years or more, like DVD players, war planes and cooking ranges -- rose by $11.2 billion (5.2%) during December 2007. Wall Street economists were expecting an increase of about 1.6%. Despite this positive economic news, the fed funds futures market is still 76% certain that the Fed will opt for a 50 basis point (0.50 percentage point) cut for short-term rates tomorrow. The odds on a 25 basis point cut are currently at 24%.

On the negative side, earlier today the Conference Board reported that the Consumer Confidence Index (CCI) fell from last month's 90.6 to 87.9 for this month; discouraging news from a consumer spending perspective. Here are the CCI figures since the summer of last year:

  • July 2007: 111.9
  • August 2007: 105.6
  • September 2007: 99.5
  • October 2007: 95.2
  • November 2007: 87.8
  • December 2007: 90.6
  • January 2008: 87.9 (preliminary)

For the CCI, the baseline score of 100 is pegged to 1985 survey results.

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 tomorrow's 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 tomorrow's FOMC monetary policy meeting: 100% (certain)

  • Current odds that the Prime Rate will be cut by 50 basis points at tomorrow's FOMC monetary policy meeting: 76% (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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