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Prime Rate

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

Thursday, May 22, 2008

Futures Market 92% Certain That The Fed Is Done with Cutting Rates for Now

If you've been waiting for just the right time to borrow money, then there is some great news for you today: it's likely that the Fed is done with the current cycle of rate cuts. This means that short-term interest rates, including the U.S. Prime Rate (currently at 5.0%), are not likely to go any lower this year. This is a great time to lock in a favorable rate on a non-mortgage loan, especially if the loan in question has a fixed interest rate (FYI: if it's a home loan you're after, mortgage rates are still looking good).

The futures market currently has odds at 92% that the Federal Open Market Committee (FOMC) will leave the benchmark Fed Funds Target Rate at its current level of 2.0% when the group meets on June 25TH, 2008. 8% in the market are betting that the Fed will cut short-term rates by 25 basis points (0.25 percentage point) on June 25TH.

Recent news that has influenced the futures market this week:

  • Speaking in New Orleans on May 20, Fed Vice Chairman Donald Kohn had this to say (clip):

    "...With the information now in hand, it is my judgment that monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term. But a large measure of uncertainty surrounds that judgment and as the economy evolves, so will the appropriate stance of policy..."

  • And here's a clip from the recently released minutes from the April 29-30 FOMC monetary policy meeting:

    "...In the Committee's discussion of monetary policy for the intermeeeting period, most members judged that policy should be eased by 25 basis points at this meeting. Although prospects for economic activity had not deteriorated significantly since the March meeting, the outlook for growth and employment remained weak and slack in resource utilization was likely to increase. An additional easing in policy would help to foster moderate growth over time without impeding a moderation in inflation. Moreover, although the likelihood that economic activity would be severely disrupted by a sharp deterioration in financial markets had apparently receded, most members thought that the risks to economic growth were still skewed to the downside. A reduction in interest rates would help to mitigate those risks. However, most members viewed the decision to reduce interest rates at this meeting as a close call..."

Of course, the incessant rise of crude oil prices isn't making the Fed's job any easier. Crude oil for future delivery is currently trading at a staggering $130.55 per barrel in New York, which is basically tantamount to throwing a big, wet towel over the U.S. economy, while at the same time stoking the flames of inflation. Yuck.

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 92% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark Federal Funds Target Rate at the current 2.0% at the June 25TH, 2008 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will remain at the current 5.0% after the June 25TH, 2008 FOMC monetary policy meeting: 92% (likely)

  • 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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