United States Prime Rate: 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 31^ST. 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 31^ST, 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 31^ST, 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: