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Prime Rate

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

Thursday, February 07, 2008

Futures Market Certain of A 50 Basis Point Cut On or Before March 18

Recession fears intensified Tuesday after investors had a chance to digest the numbers from the Institute for Supply Management's Business Activity Index. The index nosedived last month, from 54.4% for December to 41.9% for January. The scale of the decline was punctuated by the fact that any figure below 50% suggests that non-manufacturing sectors of the U.S. economy are contracting.

The Business Activity Index has been shrinking since the summer of last year, but only recently declined precipitously:

  • August 2007: 56.3%
  • September 2007: 55.7%
  • October 2007: 55.5%
  • November 2007: 54.6%
  • December 2007: 54.4%
  • January 2008: 41.9%

Here's a clip from the January report:

"...The industries reporting growth of business activity in January are: Utilities and Educational Services. The industries reporting decreased business activity in January are: Arts, Entertainment & Recreation; Agriculture, Forestry, Fishing & Hunting; Accommodation & Food Services; Health Care & Social Assistance; Transportation & Warehousing; Real Estate, Rental & Leasing; Management of Companies and Support Services; Construction; Wholesale Trade; Finance & Insurance; Information; Retail Trade; Public Administration; and Professional, Scientific & Technical Services..."

As of this evening, the fed funds futures market has odds at 80% that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) at or before the March 18 Federal Open Market Committee (FOMC) monetary policy meeting. A 20% minority in the futures market are betting that the Fed will cut short-term rates by 75 basis points between now and March 18.

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 or before the March 18TH, 2008 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 or before the March 18TH 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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