Prime Rate

also known as the Fed, National or United States Prime Rate,
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Tuesday, February 27, 2007

Probability of A Rate Cut for The May 9, 2007 FOMC Monetary Policy Meeting Now At 28%

China's Shanghai Composite stock market index sneezed today, and the world got the chills.

========

So far this week, we've had mostly negative economic news, news that translates to an increased likelihood that the Fed will lower short-term interest rates later this year.

First, it was comments made by Alan Greenspan in Hong Kong. The former Fed boss warned that the current growth cycle may be ending, and that the U.S. economy may slide into recession later this year. The economy has been growing since 2001, so I guess it's no surprise that the economy needs to take a nap.

Then the January durable goods orders report was released by the Commerce Department: orders fell by 7.8% last month (Wall Street was expecting a decline of about 3.0%.)

Wall Street then exhaled momentarily when this month's report on Consumer Confidence was released by The Conference Board: Wall Street was expecting a level of around 108; the actual figure was 112.5.

The economic news continued on a somewhat upbeat note as the National Association of Realtors┬« released their report on existing home sales for January, 2007: though preowned-home prices are still declining, and preowned-home sales were 4.3% below the January, 2006 level, used home sales were up by 3% on a month-to-month basis.


Then the really bad news hit: China's Shanghai Composite Index fell by 8.8%, as investors unloaded stocks, fearful that the Chinese government may take steps to rein in stock market speculators. Apparently, lots of Chinese are investing their life savings and borrowing heavily in order to invest in equities.

Wall Street soon reacted to the Shanghai meltdown: each of the 3 major stock market indexes ended up losing over 3% on the day, with the Dow Jones Industrial Average (DJIA) dropping 416 points, the biggest drop for the DJIA since the 911 terror attacks.

Then markets all across the globe -- from Europe to Asia -- felt the pain, as equities tumbled. Japan's Nikkei 225 average fell by 700+ points at the opening bell (Japan's economy is second only to the United States.)

To cap off the day's bad news, Freddie Mac, America's #2 mortgage buyer, said that it will

"...cease buying subprime mortgages that have a high likelihood of excessive payment shock and possible foreclosure..."

Will #1 mortgage buyer Fannie Mae follow suit? We'll have to wait and see.


The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 28% (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 May 9TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:
  • Current odds that the Prime Rate will be cut to 8.00% after the March 21ST FOMC monetary policy meeting: 12% (unlikely)
  • Current odds that the Prime Rate will be cut to 8.00% after the May 9TH FOMC monetary policy meeting: 28% (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 for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Wednesday, February 28, 2007: The Commerce Department releases the preliminary report on Gross Domestic Product for Q4, 2006.

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