United States Prime Rate

also known as the Fed, National or United States Prime Rate,
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Monday, November 26, 2007

Odds On A Rate Cut for the December 11 FOMC Meeting Now At 96%

You may have experienced some manifestation of the credit crunch going on in America's financial markets. Perhaps you were counting on getting a "no documentation" loan to buy your first house, but now find that these loans aren't available in your area. Or maybe the credit limit on your favorite credit card was recently reduced -- or perhaps the interest rate was raised -- even though you have an 800+ credit score and use credit very cautiously.

Hold on to your wallet, because credit markets may get worse before they get better. And to add salt to the proverbial wound, Wall Street has been increasing bets that a recession is lurking in the bushes, waiting for the perfect moment to pounce. Investors continued to move capital to the safety of government bonds today, which resulted in the yield on the benchmark 10-year treasury note dropping to 3.847%, a level not seen in over three years. The Dow Jones Industrial Average (DJIA) fell by 237.44 points, or 1.83%, while the S&P 500 lost 2.32% and the NASDAQ Composite fell by 2.14%. For the DJIA, today marked the first official correction since 2003. For the year, the DJIA is up only 2.249%.

The investors who trade in fed funds futures are now almost certain that the Fed will cut short-term rates again on December 11. If the Fed cuts, the dollar may get weaker against other major currencies; let's hope it doesn't collapse.

The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 96% (according to current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the December 11TH, 2007 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:
  • Current odds that the Prime Rate will be cut to 7.25% after the December 11TH, 2007 FOMC monetary policy meeting: 96% (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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