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Prime Rate

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

Monday, July 14, 2008

Futures Market 90% Certain That The Fed Will Leave Short-Term Rates Alone on August 5

If you want to help this tepid U.S. economy, review your wish list and buy something. This is no commercial for the banking industry. Simple fact is, short-term rates, like the U.S. Prime Rate, won't go any lower this year, and may even go up within the next six months as the Fed may need to take action to keep inflation in check.

The futures market currently has odds at 90% 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 August 5TH, 2008. 10% in the market are betting that the Fed will raise short-term rates by 25 basis points (0.25 percentage point) on August 5TH.

Recent and notable developments in the economy:

  • The current bear market may spook consumers with stock portfolios and retirement plans to worry about. Since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) has now lost 3,109.34 points (21.952%), while the broader S&P 500 Index has given up 336.85 points (21.522%.)

  • Crude oil for future delivery is currently trading at $145.18 per barrel in New York. On July 13, 2007, the price on crude finished the week at $73.93 per barrel. That's an increase of $71.25 (96.375%.)

  • On July 13, 2007, the euro bought 1.3783 U.S. dollars in New York. Right now, the euro buys 1.5896 U.S. dollars.

  • On July 13, 2007, the yield on the 10-Year Treasury Note finished the week @ 5.107%. Today the yield closed at 3.88%.

  • On the positive side, the Institute for Supply Management reported that its Purchasing Manager's Index (PMI) advanced from 49.6 for May to 50.2% for June. Any figure above 50% suggests that, generally, the American manufacturing sector is expanding, while any figure below 50% suggests contraction. The PMI hasn't been above 50% since January 2008.

  • On June 24, 2008, The Conference Board reported that its Consumer Confidence Index (CCI) for June 2008 fell to 50.4. The CCI has been declining since December of last year:

    December 2007: 90.6
    January 2008: 87.3
    February 2008: 76.4
    March 2008: 65.9
    April 2008: 62.8
    May 2008: 58.1
    June 2008: 50.4 (preliminary)
    The CCI offers insight about how consumers are feeling about the U.S. economy and their own financial circumstances. The baseline "100" score is associated with 1985 survey data.

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 90% (as implied by current pricing on contracts) that the FOMC will elect to leave the benchmark Federal Funds Target Rate at the current 2.0% at the August 5TH, 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 August 5TH, 2008 FOMC monetary policy meeting: 90% (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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