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Prime Rate

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

Monday, March 17, 2008

Fed Will Cut Short-Term Rates by At Least 100 Basis Points Tomorrow

Shares of the investment bank Bear Stearns fell 87% today to close at $4.81. The stock was at $145.49 on March 19, 2007. Though a rescue plan is in place for Bear (the company will likely be sold to JPMorgan Chase at a fire sale price), the Fed is still worried about the health of the financial sector. Confidence is evaporating fast, and the everyone is counting on the Fed to use its powers to help stabilize the system.

Credit markets need a serious boost, and the Fed will deliver. Yesterday, the FOMC lowered the discount rate by 25 basis points to 3.25%. In all likelihood, the FOMC will lower the Fed Funds Target Rate by at least 100 basis points tomorrow afternoon.

Right now, the fed funds futures market has odds at 84% that the Fed will cut the benchmark Fed Funds Target Rate by 100 basis points (1.00 percentage point) at the March 18TH FOMC monetary policy meeting. 16% are betting that the Fed will cut short-term rates by 125 basis points tomorrow.

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 100 basis points (1.00 percentage point) at 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 100 basis points at 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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