Prime Rate

also known as the Fed, National or United States Prime Rate,
from the interest-rate specialists at www.FedPrimeRate.comSM

Friday, January 26, 2007

Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 2%

The Federal Open Market Committee (FOMC) is set to convene their first monetary policy meeting of 2007 on Tuesday; it's a two-day meeting, so they'll announce their decision about interest rates on Wednesday (January 31.)

What do we know right now? We know that the Fed won't tamper with interest rates next week, so, after next week's FOMC meeting, the national Prime Rate will remain at the current 8.25%. At this point, it is also very likely that the Fed will leave interest rates alone at the second FOMC meeting of 2007, which is set to take place on March 21ST.

The probability that the Fed will cut rates at the end of June dropped to 2% today after investors had a chance to digest reports on housing and durable goods orders:

  • The data in the December Existing Home Sales report (released yesterday) were mixed: though inventories were lower and prices showed signs of stabilizing, on a month-to-month basis, existing homes sales declined by 0.8%. Furthermore, on a year-to-year basis (2005-2006), existing home sales declined by 8.4% (2005 was the stronger year on record for existing home sales @ 7,075,000.)
  • The December New Homes Sales numbers were quite positive, with a month-to-month increase of around 4.8%, and inventories dropped from 549,000 homes to 539,000. However, the positive month-to-month numbers were tempered by the year-to-year stats: between 2005 and 2006, new home sales fell by 17.3%.
  • Good news from the manufacturing sector: December Durable Goods Orders were up by 3.1% last month. However, this news was tempered by demoralizing news from the auto industry: Ford Motor recently reported that 2006 was the worst year on record for the company -- a loss of $12.7 billion (that's right: billion.) 2006 was also a bad year for both DaimlerChrysler and General Motors: both companies are expected to report a significant loss for '06.

The Fed will cut interest rates later this year only if the U.S. economy needs the boost. What's the prognosis for the U.S. economy? Judging by the money on Wall Street, it's not too bad. When investors are feeling good about the economy's future, they tend to invest less in U.S. treasuries and more in stocks. As demand for government notes declines, the yield on those notes rises. Today, the yield on the benchmark 10-year treasury note rose to 4.879%. About two months ago -- on November 24, 2006 -- the yield on the ten-year note was 4.548.

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 2% (according to current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the June 28TH, 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 31ST and March 21ST FOMC monetary policy meetings.
  • Current odds that the Prime Rate will be cut to
    8.00% on June 28TH, 2007: 2% (very unlikely)
  • NB: Prime Rate = (The Federal 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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