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Prime Rate

also known as the Fed, National, U.S. and WSJ Prime Rate,
from the interest rate specialists at FedPrimeRate.comTM

Friday, October 10, 2008

Futures Market 100% Certain Fed Will Cut Short-Term Rates Again At The October 29 Fed Meeting

stock market crashAs defined by Wikipedia.org, a stock market crash is:

"...[a] double-digit percentage losses in a stock market index over a period of several days..."

The stock market crashed this past week. For the week, the Dow Jones Industrial Average (DJIA) lost 1,874.19 points (-18.151%) to close at 8,451.19, while the NASDAQ Composite Index gave up 297.88 points (-15.296%) to close at 1,649.51. The S&P 500 Index declined by 200.01 points (-18.195%) to close at 899.22.

Also from Wikipedia.org, a bear market is thus defined:

"...a bear market is not a simple decline, but a substantial drop in the prices of the majority of stocks in a given market over a defined period of time. According to The Vanguard Group, "While there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period..."
And now for the bear market update.

Since closing with record highs on October 9, 2007, the DJIA has now lost 5,713.34 points (40.336%), while the S&P 500 Index has declined by 665.93 points (42.547%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15. The DJIA was reconfigured recently.


The NASDAQ Composite is a unique, tech-heavy index, so we won't include it in the bear market update. Heck: let's do the numbers for NASDAQ anyway, just for fun.

The record high for the NASDAQ Composite Index -- 5,048.62 -- was set on March 10, 2000; it finished the week at 1,649.51. That's a decline of 3,399.11 points (67.328%).

Banks are still extremely wary of lending to other banks, despite the highly coordinated round of rate cuts executed by central banks across the industrialized world on Wednesday. We can find the best evidence of this by observing where the Eurodollar LIBOR rates ended the week. The 3-Month LIBOR yield finished the week 0.31875 percentage point above the U.S. Prime Rate, and an extraordinary 4.63875 percentage points above the yield on the 3-Month Treasury Bill (click here to learn about the TED Spread.) Translation? Banks across the globe see default risk everywhere, and are therefore very reluctant to lend money. The money is there, they're just hoarding it.

The only good news this week? The cost associated with filling your car or truck with gas or diesel is very likely to decline significantly within the next few business days. Crude oil for future delivery ended the week at $77.70 per barrel in New York; that's a decline of $29.19 (27.308%) since the price on light, sweet crude closed at $106.89 per barrel on September 26, 2008.


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 Federal Open Market Committee (FOMC) will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the October 29TH, 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 October 29TH, 2008 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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