Probability of A Rate Cut for The March 21, 2007 FOMC Monetary Policy Meeting Drops to 10% On Encouraging Housing Data

The current national Prime Rate is 8.25%: get used to it!

Bottom line: the Fed will only lower interest rates next year if the U.S. economy needs a helping hand.

Right now, the nation's housing sector is arguably the biggest cause for concern. But this week's data related to the housing market was encouraging: both new and existing home sales showed improvement in November. Of course, it's really too soon to celebrate, because when the November housing numbers are compared to the numbers from a year ago, it's still quite clear that a lot more buying/selling activity will have to happen in the coming months before real estate agents can stop holding their collective breath.

In light of the latest housing numbers, the Fed is now less likely to lower interest rates before the third quarter of 2007. Contributing to the decreased likelihood of a rate cut for early 2007: The Conference Board's Consumer Confidence Index jumped from 102.9 last month to 109.0 for December '06.

• Good news for home shoppers and investors: for both new and existing homes, inventories -- the number of homes on the market -- are still high, and prices are quite stagnant. Furthermore, foreclosures are likely to rise in the new year (it's really important to understand how Adjustable Rate Mortgages (ARM's) and Payment-Option Mortgages work!)

The Latest Odds

Of course, investors reacted to this week's housing news. As of right now, the folks who trade in Federal Funds Futures have odds at around 10% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will elect to lower the benchmark Federal Funds Target Rate by 25 basis points at the March 21^ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

• In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31^ST FOMC monetary policy meeting.
  
• Current odds that the Prime Rate will be cut to 8.00% at the
  March 21^ST, 2007 FOMC monetary policy meeting: 10% (very unlikely)
  
• NB: 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 Federal Funds Target Rate -- are continually changing, so stay tuned to this blog for the latest odds.

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Probability of A Rate Cut for The March 21, 2007 FOMC Monetary Policy Meeting Drops to 17%

If you're happy with the current U.S. Prime Rate level -- 8.25% -- then we have good news for you: it's not budging any time soon.

A number of key economic reports were released by the government this past week, including Housing Starts, PPI, GDP Final, Leading Economic Indicators, Durable Goods Orders, Consumer Sentiment, Consumer Spending, and the Philadelphia Fed's Business Outlook Survey. The economic picture is still mixed, which is nothing to get excited about, but, on the positive side, no one is predicting economic disaster for 2007: many economists and academics are forecasting that the U.S. economy will expand by about 3.0% next year. Of course, moderate growth is good news from a price stability perspective, and it should also translate to short-term interest rate stability.

Bottom line: if the Fed does decide to cut interest rates next year, it's not likely to happen before the third quarter of 2007.

Right now, the biggest drags on the U.S. economy are manufacturing and housing:

• Bad news out this week, from a manufacturing perspective : the folks at Toyota are planning to produce an astonishing 9,420,000 vehicles in 2007; General Motors may end up as the global #2 auto manufacturer if the top brass at Toyota realize their 2007 goal.
• Bad news out this week, from a housing perspective: According to the final, third-quarter GDP report released yesterday, residential fixed investment fell by 18.7% during Q3, 2006; in the preliminary GDP report released last month, the figure was reported at 18.0%. Furthermore, the Center for Responsible Lending recently forecast that approximately 1 out of every 5 subprime mortgages originated during the past 2 years will end up in foreclosure, and losses for subprime mortgage holders may climb as high as $164 billion over the next several years -- mainly in the form of lost home equity.

The Latest Odds

Of course, investors have reacted to this week's news and economic reports. As of right now, the folks who trade in Federal Funds Futures have odds at around 17% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will elect to lower the benchmark Federal Funds Target Rate by 25 basis points at the March 21^ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

• In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31^ST FOMC monetary policy meeting.
• Current odds that the Prime Rate will be cut to 8.00% at the
  March 21^ST, 2007 FOMC monetary policy meeting: 17% (unlikely)
  
  
• NB: 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 Federal Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift after the release of the following economic reports:

• Wednesday, December 27, 2006: The Commerce Department releases their report on November New Home Sales.
• Wednesday, December 28, 2006: The National Association of Realtors® releases the November Existing Home Sales report.

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Fed Leaves Short-Term Rates Alone: Prime Rate Remains at 8.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned the eighth and last monetary policy meeting of 2006, and, in keeping with the latest odds and predictions, the FOMC voted to leave short-term interest rates at their current level. Therefore, the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street Journal® Prime Rate (also known as the U.S. or Fed Prime Rate) will remain at the current 8.25%.

The Fed has voted to keep short-term rates unchanged four times in a row now, and, for the fourth FOMC meeting in a row, Fifth District Federal Reserve Bank President Dr. Jeffrey M. Lacker was the sole dissenter: Dr. Lacker once again voted for a 25 basis point (0.25 percentage point) increase for the Fed Funds Target Rate.

Here's a clip from the press release that was issued by the FOMC earlier this afternoon:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters.

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting."

The Latest Odds: What's Ahead for The Prime Rate?

As of right now, Fed Funds Futures traders have odds at around 28% (according to current pricing on contracts) that the FOMC will elect to lower the Federal Funds Target Rate by 25 basis points at the March 21^ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

• In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31^ST FOMC monetary policy meeting.
  
• Current odds that the Prime Rate will be cut to
  8.00% on March 21^ST, 2007: 28% (not likely)
  
• NB: Prime Rate = (The Fed Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned to this blog for the latest odds.

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FOMC Meeting Today: No Fed Action Expected

Later today, the Federal Open Market Committee (FOMC) of the Federal Reserve will convene the eighth monetary policy meeting of 2006, which will also be the last FOMC gathering of the year. At around 2:15 pm Eastern Time, the FOMC will announce their decision on interest rates, and it is fully expected that the group will elect to leave the benchmark Federal Funds Target Rate unchanged at 5.25%. This means that the Wall Street Journal® Prime Rate (also known as the Fed or national Prime Rate) will remain at the current 8.25% for the rest of the year.

After today's meeting, the next FOMC monetary policy gathering will occur on January 30-31, 2007 (a two-day meeting) and, as of right now, the vast majority of investors, academics and Wall Street economists expect the Fed to neither raise nor lower the Federal Funds Target Rate at that meeting.

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Probability of A Rate Cut for The March 21, 2007 FOMC Monetary Policy Meeting Drops to 36% on November Jobs Report

Certain sectors of the economy -- like housing and manufacturing -- are hurting right now, and may continue to decline into 2007. But the employment picture is still pretty darn rosy, which is helping to balance things out.

According to the November Employment Situation Report (released this past Friday), the American workforce got 132,000 jobs bigger last month; Wall Street prognosticators were expecting around 100,000 jobs. The unemployment rate rose from 4.4% to 4.5% in November, but that certainly didn't raise any eyebrows.


The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 36% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will elect to lower the Federal Funds Target Rate by 25 basis points at the March 21^ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

• In all likelihood, the Prime Rate will remain at the current 8.25% after the December 12^TH and January 31^ST FOMC monetary policy meetings.
  
• Current odds that the Prime Rate will be cut to
  8.00% on March 21^ST, 2007: 36% (not likely)
• Current odds that the Prime Rate will be cut to
  8.00% by May 9^TH, 2007: 93% (likely)
  
• NB: Prime Rate = (The Fed Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned to this weblog for the latest odds.

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Probability of A Rate Cut for The March 21, 2007 FOMC Monetary Policy Meeting Hits 80% On ISM Manufacturing Report

The odds that the Federal Reserve will cut interest rates by the March 21, 2007 Federal Open Market Committee (FOMC) monetary policy meeting are now at 80%, and will likely rise in short order. In fact, investors have recently priced in 28% odds that the Fed will elect to cut the benchmark Federal Funds Target rate by 25 basis points at the January 31, 2007 monetary policy meeting.

The latest probability shift comes as a result of today's Institute for Supply Management's (ISM) report on November manufacturing: the November Purchasing Manager's Index (PMI). The PMI for last month was 49.5%. Any figure above 50% indicates an expanding factory sector; below 50% indicates that U.S. manufacturing is contracting. Last month marked the first time the index fell below 50% in years.

A rate cut by next year is almost a certainty now, not only because the waning manufacturing sector makes up twelve percent of the U.S. economy, but also because of this statistic: the Fed has always cut interest rates within a year after the PMI has dropped below 50%.

Though many Fed officials are still warning that inflation may still be a problem moving forward, the economy is nevertheless putting considerable pressure on America's central bank to lower interest rates. Key sectors are hurting: housing, cars and now manufacturing, and more economists are abandoning hopes of a soft landing, and are now thinking recession. Adding further pressure today: the yield on the 10-year treasury note fell to 4.425%.


The Latest Odds

As of right now, the folks who trade in Fed Funds Futures have odds at around 80% (according to current pricing on contracts) that the FOMC will elect to lower the Federal Funds Target Rate by 25 basis points at the March 21^ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

• In all likelihood, the Prime Rate will remain at the current 8.25% after the December 12^TH FOMC monetary policy meeting.
  
• Current odds that the Prime Rate will be cut to
  8.00% on January 31^ST, 2007: 28% (unlikely)
  
• Current odds that the Prime Rate will be cut to
  8.00% on March 21^ST, 2007: 80% (somewhat likely)
  
  
• NB: Prime Rate = (The Fed Funds Target Rate + 3)

The U.S. Prime Rate (WSJ Prime Rate) is currently 8.25%.

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

• Friday, December 8, 2006: The Labor Department releases the Employment Situation report for November

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