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Prime Rate

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

Wednesday, August 27, 2008

Futures Market 92% Certain Prime Rate Will Remain at 5.00% After September 16 Fed Meeting

Yesterday's positive news that The Conference Board's Consumer Confidence Index (CCI) rose from 51.9 for July to 56.9 for this month was offset by new evidence that the North American banking sector still has some way to go before it's out of the woods. Here's a clip from a press release issued by the Federal Deposit Insurance Corporation (FDIC) yesterday:

"Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported net income of $5.0 billion in the second quarter of 2008, a decline of $31.8 billion (86.5 percent) from the $36.8 billion that the industry earned in the second quarter of 2007. With the exception of the fourth quarter of last year, the latest earnings were the lowest for the industry since the fourth quarter of 1991.

'By any yardstick, it was another rough quarter for bank earnings, but the results were not unexpected as the industry coped with financial market disruptions, the housing slump, worsening economic conditions and the overall downturn in the credit cycle,' said FDIC Chairman Sheila C. Bair.

The FDIC's 'problem list' grew to 117 institutions from 90 at the end of the first quarter. That is largest number on the list since the middle of 2003. Total assets of problem institutions increased from $26 billion to $78 billion, with $32 billion coming from IndyMac Bank, F.S.B., Pasadena, CA, which failed in July. 'More banks will come on the list as credit problems worsen,' Chairman Bair added. 'Assets of problem institutions also will continue to rise...'"

The FDIC believes that 117 American financial institutions are looking pale in the face. More bank failures on the way? Almost certainly.


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 September 16TH, 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 September 16TH, 2008 FOMC monetary policy meeting: 92% (likely)

  • Current odds that the Prime Rate will remain at the current 5.0% after the October 29TH, 2008 FOMC monetary policy meeting: 83% (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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