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Prime Rate

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

Saturday, January 19, 2008

Odds That The Fed Will Cut Short-Term Rates by 75 Basis Points Now at 72%

Despite a significant rise for the Consumer Sentiment Index this month -- from 75.5 for December to 80.5 for January -- investors pulled more money out of stocks and into safer investments like U.S. Treasuries. Since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) has now lost 2,065.23 points (14.58%), while the S&P 500 has lost 239.96 points (15.331%). Yikes! On Friday, the yield on the 10-Year Treasury Note fell to 3.648%.

Last week, I remarked at how intense the odds from the fed funds futures market were looking. This week, the odds are still pretty intense. No one is betting that the Fed will cut rates by a wimpy 25 basis points (0.25 percentage point) by January 30 anymore. The future market now sees a 72% chance that the Fed will cut the benchmark Fed Funds Target Rate by 75 basis points (0.75 percentage point) by January 30TH. In other words, the futures market believes, with 100% certainty, that the Fed will cut short-term rates by at least 50 basis points by the end of the month, with odds at 28% that we will get a cut of no more than 50 basis points by January 30TH.

What do these odds mean in real world terms? Well, if you have a variable-rate credit card that's indexed to the WSJ Prime Rate, then chances are your APR will be 0.50 percentage point lower by the time January 31 arrives. This is true for any loan or credit product that's tied to the U.S. Prime Rate. For some consumers, it may take a month or so for your bank to implement the rate change, but it's something you can look forward to.

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 50 basis points (0.50 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 50 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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