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Prime Rate

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

Monday, March 10, 2008

Odds On A 75 Basis Point Rate Cut for March 18 Hit 96% On Weak Jobs Report

Thanks to a surprisingly anemic jobs report, and other economic news suggesting that a recession may be in the offing, the fed funds futures market is now 100% certain that the Fed will cut short-term rates by at least 75 basis points (0.75 percentage point) this month.

  • On Friday, the Labor Department reported that nonfarm payrolls declined by 63,000 during February 2008. Wall Street economists were expecting payrolls to advance by about 25,000. What's worse, the nonfarm payrolls figure for January was revised down from a loss of 17,000 jobs to a loss of 22,000. The latest employment figures have led many economists to believe that the U.S. economy is already in a recession.

  • The stock market recoiled in response to the February jobs report. Since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) is now 2,270.84 points (16.032%) lower, while the S&P 500 Index has shed 271.78 points (17.364%.)

  • The prospect of an imminent and aggressive rate cut from the Fed has precipitated a further weakening of the dollar and has helped to send crude oil prices to record highs. By Friday evening, one euro could be traded for $1.5356 in New York, while one dollar bought 0.6512 euro. The price on crude oil for future delivery closed at $105.15 per barrel.

  • On Monday, the Institute for Supply Management reported that the Purchasing Manager's Index (PMI) fell from 50.7% for January to 48.3% for February. Any figure above 50% suggests that, generally, U.S. manufacturing is expanding, while any figure below 50% suggests that the American manufacturing sector is contracting.

  • On Friday, the Federal Reserve announced that it will expand its Term Auction Facility (TAF) in a continuing effort to keep financial markets from seizing up.

As of right now, the fed funds futures market has odds at 96% that the Fed will cut the benchmark Fed Funds Target Rate by 75 basis points (0.75 percentage point) at or before the March 18TH Federal Open Market Committee (FOMC) monetary policy meeting. A 4% minority in the futures market are betting that the Fed will cut short-term rates by 100 basis points at some point between now and March 18TH.

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 75 basis points (0.75 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 75 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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