United States Prime Rate

also known as the Fed, National or United States Prime Rate,
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Wednesday, October 31, 2007

U.S. Prime Rate Is Now 7.50%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its seventh monetary policy meeting of the year, and, in accordance with the latest forecast, the FOMC has just lowered its target for the benchmark Federal Funds Rate by 25 basis points (0.25 percentage point) to 4.50%. Therefore, as of this afternoon, the U.S. Prime Rate is now 7.50%. Many American banks have already issued a press release announcing that their prime lending rate has been lowered from 7.75% to 7.50%, including:

  • The Bank of America and LaSalle Bank*
  • Wells Fargo
  • Wachovia
  • KeyCorp

Here's a clip from a press release issued by the FOMC a few minutes ago:

"...The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh. Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco..."

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Fed Rate Decision Today: Odds On A Cut at 94%

A week ago, the odds that the Fed will opt to lower short-term interest rates on Halloween were at 100%, according to pricing on contracts at the fed funds futures market. Right now, the market isn't as confident as it was 7 days ago that a rate cut is coming later this afternoon, but the odds are still quite strong in favor of a cut; 94% strong.

So if you're hoping that the Fed will deliver a treat for American consumers this Halloween, then you most likely won't be disappointed.

Since the Federal Open Market Committee (FOMC) opted to cut aggressively last month, there is a slight chance that the FOMC will opt to shift to wait-and-see mode today and vote to leave interest rates alone. After all, many sectors of the economy are doing just fine, and the employment situation is still rosy. If the group chooses to do nothing with the Federal Funds Target Rate later today, the dollar may recover a bit, but the stock market will almost certainly react negatively. The Fed doesn't want to cut just to give Wall Street what it wants or expects, but a sharp decline in stocks could combine with credit market turmoil, housing woes and subprime misery and cause the economy to decelerate into recession, and the Fed doesn't want that either. So, if the Fed is actually on the fence about cutting rates right now, the Wall Street element may just be the factor that gets the FOMC to cut rates today.

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The Fed will release their decision on interest rates at around 2:15 this afternoon. Stay tuned!


The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 94% (according to current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting (today.)


Summary of the Latest Prime Rate Forecast:
  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 FOMC monetary policy meeting: 94% (very 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 continually changing, so stay tuned for the latest odds.

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Wednesday, October 24, 2007

Futures Market Now Certain That A Rate Cut Will Happen On October 31

Earlier today, the National Association of Realtors® released the existing homes sales report for September. According to the report, sales of preowned homes fell by 8.0% since August, and by 19.1% since September of '06. The median price for a used home was down by 4.2% when compared to 12 months previous, while the average price was down by 3.2%. Inventories of preowned homes remained high, which portends more pain for the housing sector for months to come.

The futures market reacted to today's housing news: the odds on a rate cut for the October 31ST Federal Open Market Committee (FOMC) monetary policy meeting jumped to 100%. It's a pretty safe bet that news of Merrill Lynch's worst quarterly loss in the company's history also influenced the futures market this morning. Merrill is the latest casualty of the nation's subprime mortgage debacle.

Here's another safe bet: if the Fed cuts rates as expected, the dollar will continue to decline and commodities like crude oil and gold will likely soar to record highs. Yep.

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Looks like consumers are in for a treat this Halloween: the cost of borrowing in America is about to get a bit cheaper.


The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 100% (according to current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:
  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 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 continually changing, so stay tuned for the latest odds.

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Friday, October 19, 2007

Odds On A Rate Cut for the October 31 FOMC Meeting Hit 92% On Flight to Quality

Stocks fell sharply today -- over 2.5% for each of the 3 major indexes. The Dow Jones Industrial Average (DJIA) lost 367 points; all 30 component companies that make up the DJIA retreated today. Today also happens to be the anniversary of the 1987 stock-market crash. Hmmm...

Investors got spooked by disappointing earnings reports and by continued concern about the turmoil that still exists in international credit markets. Lots of Wall Street money was moved to the safety of U.S. Treasuries, as evidenced by lower yields on the 30-year bond and the 10-year note.

Crude oil and gold prices surged, as the dollar once again lost ground against the euro and other major currencies this week. But the dollar's continued decline wasn't enough to convince futures traders that the Fed won't cut interest rates on October 31. In fact, the investors who trade in fed funds futures are now quite confident that the Fed will lower short-term interest rates on Halloween; 92% confident. Odds on a rate cut were at 70% yesterday.


The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 92% (according to current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:
  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 FOMC monetary policy meeting: 92% (likely)
  • NB: U.S. Prime Rate, currently @ 7.75%, = (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 continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Wednesday, October 24, 2007: The National Association of Realtors® releases the Existing Home Sales report for September.

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Thursday, October 18, 2007

Odds On A Rate Cut for the October 31 FOMC Meeting Shoot Up to 70% On Higher-Than-Expected Unemployment Insurance Claims

Early this morning, the Labor Department reported that 337,000 Americans lined up to claim unemployment benefits for the first time during the week that ended on October 13. This news came as a surprise to Wall Street, as economists were expecting around 312,000 new claims for unemployment benefits.

The fed funds futures market reacted swiftly to the latest employment news. The odds on a rate cut for October 31, which were at 54% yesterday, are now at 70%. Still not a sure thing, but there's still plenty of time before the Halloween decision about short-term rates, and the markets that move commercial paper are still quite constipated. Stay tuned.


The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 70% (according to current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:
  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 FOMC monetary policy meeting: 70% (somewhat likely)
  • NB: U.S. Prime Rate, currently @ 7.75%, = (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 continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Wednesday, October 24, 2007: The National Association of Realtors® releases the Existing Home Sales report for September.

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Wednesday, October 17, 2007

Odds On A Rate Cut for the October 31 FOMC Meeting Now at 54%

The fed funds futures market is currently betting -- albeit without too much certainty -- that the Federal Open Market Committee (FOMC) will vote to lower short-term interest rates on October 31ST. On October 9, the odds on a rate cut were at 36%. Right now, the odds are at 54%. Influencing the futures market this week:

  • The Commerce Department reported that there were 1,191,000 housing starts last month; that's 10.2% below the August estimate, and 30.8% below the September, 2006 figure.
  • The Federal Reserve's most recent anecdotal survey of the U.S. economy, also known as the Beige Book, contained the following:

    ...Residential real estate markets continued to weaken, and most Districts reported additional declines in home sales, prices and construction. Financial institutions reported an increase in delinquencies and slight deterioration in credit quality. Lenders in many Districts tightened credit standards, particularly for real estate. The majority of reports indicated an increase in business lending but a decline or slower growth in consumer lending...

    ...Contacts in a number of industries indicated a higher-than-usual degree of uncertainty about the outlook for economic activity. Many real estate contacts expect housing markets to remain subdued for several months. At firms without direct ties to real estate and construction, contacts are still wary that credit tightening and slowing construction might slow activity in their industry, but there is cautious optimism because few see much evidence of such spillovers at this time..."
  • In a recent speech in New York, Fed boss Ben Bernanke made the following comments:

    ...This has been a challenging period. Conditions in financial markets have shown some improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time, and we may well see some setbacks. In particular, investors are continuing to reassess the risks they face and have not yet fully regained confidence in their ability to accurately price certain types of securities. The ultimate implications of financial developments for the cost and availability of credit, and thus for the broader economy, remain uncertain.

    In coming months, the Federal Reserve, together with other agencies both here and abroad, will perform comprehensive reviews of recent events to better understand the episode and to draw lessons for the future. For now, the Federal Reserve will continue to watch the situation closely and will act as needed to support efficient market functioning and to foster sustainable economic growth and price stability...

The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 54% (according to current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:
  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 FOMC monetary policy meeting: 54% (somewhat likely)
  • NB: U.S. Prime Rate, currently @ 7.75%, = (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 continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Wednesday, October 24, 2007: The National Association of Realtors® releases the Existing Home Sales report for September.

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Tuesday, October 09, 2007

Odds On A Rate Cut for the October 31 FOMC Meeting Drop to 36% On Release of FOMC Minutes

Earlier today, the Fed released the minutes from the September 18 FOMC monetary policy meeting; the Fed decided to lower the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) on September 18, which caused the U.S. Prime Rate to drop from 8.25% to the current 7.75%. Here are a few clips from those minutes:

...Although employment probably was not as weak as the most recent monthly data had suggested, trend growth in jobs had fallen off even prior to the recent financial market strains, and participants judged that some further slowing of employment growth was likely. Indeed, financial services firms had already announced layoffs, largely reflecting mortgage market developments, the demand for temporary workers appeared to have softened, and the most recent weakening in construction employment was likely to continue for a while. Moreover, if declines in house prices were to damp consumption, that could feed back on employment and income, exerting additional restraint on the demand for housing. Nonetheless, to date, initial claims for unemployment insurance did not indicate a substantial and widespread weakening in labor demand, and labor markets across the country generally remained fairly tight, with several participants citing continued reports of shortages of labor from their contacts in some sectors...

...The housing sector remained exceptionally weak. Home sales had dropped considerably this year: Sales of new and existing single-family homes in July were down substantially from their averages over the second half of last year. Demand was restrained by deteriorating conditions in the subprime mortgage market and by an increase in rates for thirty-year fixed-rate conforming mortgages. In the nonconforming mortgage market, the availability of financing to borrowers recently appeared to have been crimped even further. Most forward-looking indicators of housing demand, including an index of pending home sales, pointed to a further deterioration in sales in the near term. Single-family starts slid in July to their lowest reading since 1996, and adjusted permit issuance continued on a downward trajectory. Although single-family housing starts had come down substantially from their peak, the drop had lagged the decline in demand, and as a result, inventories of new homes had risen considerably. In the multifamily sector, starts in July were in line with readings thus far this year and at the low end of the fairly narrow range seen since 1997. Meanwhile, house prices generally continued to decelerate...

...The Committee agreed that the statement to be released after the meeting should indicate that the outlook for economic growth had shifted appreciably since the Committee's last regular meeting but that the 50 basis point easing in policy should help to promote moderate growth over time. They also agreed that the inflation situation seemed to have improved slightly and judged that it was no longer appropriate to indicate that a sustained moderation in inflation pressures had yet to be shown. Nonetheless, all agreed that some inflation risks remained and that the statement should indicate that the Committee would continue to monitor inflation developments carefully. Given the heightened uncertainty about the economic outlook, the Committee decided to refrain from providing an explicit assessment of the balance of risks, as such a characterization could give the mistaken impression that the Committee was more certain about the economic outlook than was in fact the case. Future actions would depend on how economic prospects were affected by evolving market developments and by other factors...

The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 36% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) of the Federal Reserve will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:
  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 FOMC monetary policy meeting: 36% (not likely)
  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3) = 7.75%.

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 continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

Wednesday, October 17, 2007: The Labor Department releases the Consumer Price Index report for September.

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Friday, October 05, 2007

Odds On A Rate Cut for the October 31 FOMC Meeting Now at 48%

According to this morning's jobs report, the American workforce grew by 110,00 jobs during September, and the unemployment rate rose to 4.7%. Economists were expecting a rise of about 150,000 new, non-farm payrolls for September, so the actual figure came as no real surprise to economists and rate watchers.

What's surprising to me is the fact that Wall Street takes the initial report on non-farm payrolls released by the Labor Department seriously. The discrepancy between the initial, non-farm payrolls report for a given month and the revised report released a month later is often significant, and sometimes the discrepancy is so wide that it makes me wonder why the Labor Department doesn't seriously rework the way it reports its numbers. For example, last month the Department of Labor reported that the U.S. economy lost 4,000 jobs during August. Today, the Labor Department released revised figures for August, and reported that the economy actually gained 89,000 jobs! From -4,000 to +89,000? Makes me wonder if the Fed cut too aggressively on September 18 (the Fed cut the benchmark Fed Funds Target Rate by 50 basis points on September 18, which caused the U.S. Prime Rate to drop from 8.25% to 7.75%.)

Nevertheless, the fed funds futures market reacted to today's employment report, and is now on the fence as to whether the Fed will opt to lower rates or do nothing on October 31.

The Latest Odds

As of right now, the investors who trade in fed funds futures have odds at 48% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) of the Federal Reserve will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the October 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:
  • Current odds that the Prime Rate will be cut to 7.5% after the October 31ST, 2007 FOMC monetary policy meeting: 48% (on the fence)
  • NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3) = 7.75%.

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 continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Wednesday, October 17, 2007: The Labor Department releases the Consumer Price Index report for September.

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