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Prime Rate

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

Wednesday, January 02, 2008

Odds On A Rate Cut for the January 30 Monetary Policy Meeting Now at 100%

The odds that the Fed will cut short-term rates on January 30TH hit 100% today on discouraging news related to U.S. manufacturing, and the release of minutes from the December 11TH Federal Open Market Committee (FOMC) meeting. In fact, the implied odds that the Fed will opt for an aggressive 50 basis point (0.50 percentage point) cut are now at 24%, with odds of a 25 basis point cut at 76%.

Influencing the futures market today:

  • The Institute for Supply Management's Purchasing Manager's Index (PMI) for December came in at 47.7%. With the PMI, any figure above 50% suggests that the U.S. manufacturing is expanding, while any figure below 50% suggests that manufacturing is contracting. Wall Street economists were expecting around 50.9% for December. The PMI has been falling since June of 2007. This news adds credence to the notion that a recession may be in the offing.

  • Earlier this afternoon, the FOMC released the minutes from it's December 11TH monetary policy meeting. Here's a clip:

    "...Participants noted the marked deceleration in consumer spending in the national data. Real personal consumption expenditures had shown essentially no growth in September and October, suggesting that tighter credit conditions, higher gasoline prices, and the continuing housing correction might be restraining growth in real consumer spending. Retailers reported weaker results in many regions of the country, but in some, retailers saw solid growth. Job growth rebounded somewhat in October and November, and participants expected continuing gains in employment and income to support rising consumer spending, though they anticipated slower growth of jobs, income, and spending than in recent years. However, consumer confidence recently had dropped by a sizable amount, leading some participants to voice concerns that household spending might increase less than currently anticipated.

    Recent data and anecdotal information indicated that the housing sector was weaker than participants had expected at the time of the Committee’s previous meeting. In light of elevated inventories of unsold homes and the higher cost and reduced availability of nonconforming mortgage loans, participants agreed that the housing correction was likely to be both deeper and more prolonged than they had anticipated in October. Moreover, rising foreclosures and the resulting increase in the supply of homes for sale could put additional downward pressure on prices, leading to a greater decline in household wealth and potentially to further disruptions in the financial markets..."

The prospect of another rate cut by the Fed sent the price of gold and crude oil higher today: crude for future delivery is currently trading at $99.60 per barrel, with New York Spot Gold at $858.20 per ounce.

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, 2007 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 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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