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Prime Rate

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

Tuesday, March 25, 2008

Futures Market Certain The Fed Will Cut Rates Again on April 30

The Fed has cut short-term rates aggressively -- by 300 basis points (3.00 percentage points) since mid-September of last year -- in an attempt to inject vitality into the sluggish economy and help ease turmoil in credit markets. The Fed doesn't want to cut rates by too much, which could easily create another wave of asset bubbles in the future. According to current odds from the fed funds futures market, however, the Fed will cut again on April 30.

Recent economic news influencing the futures market:

  • Last Thursday, The Conference Board reported that the nation's leading economic indicators fell by 0.3% during February 2008, which is what Wall Street economists were expecting.

  • Also last Thursday, the Federal Reserve Bank of Philadelphia reported that its diffusion index of current manufacturing activity in the Philadelphia area (the Fed's Third District) came in at -17.4 for this month. Any figure below zero indicates that manufacturing in the Fed's Philadelphia region is contracting, while a positive figure implies expansion. The Fed's Third District includes all of Delaware, parts of southern New Jersey, and a large section of eastern Pennsylvania.

  • Yesterday, the National Association of Realtors¬® released its report on sales of previously owned homes for February. Though sales of previously occupied homes improved during February, the median and average price for a used home declined for the third straight month. According to preliminary estimates, the median price on a used home in the United States was $195,900, while the average price was $241,900.

  • Earlier today, The Conference Board reported that the Consumer Confidence Index (CCI) fell to 64.5 this month. Wall Street economists were expecting ~73.0. The CCI has been declining from month to month since last summer (the July 2007 figure was 111.9.) For the CCI, the baseline score of 100 is associated with 1985 survey results.

Right now, the fed funds futures market has odds at 66% that the Fed will cut the benchmark Fed Funds Target Rate by 25 basis points (0.25 percentage point) at the April 30TH FOMC monetary policy meeting. 34% are betting that the Fed will cut short-term rates by 50 basis points at the end of next month.

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 the April 30TH, 2008 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 April 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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