Odds On A Rate Cut for the January 30 Monetary Policy Meeting Now at 94%

A mixed report on existing home sales caused the odds on a rate cut for next month to jump to 94% today. According to the National Association of Realtors®, sales of previously occupied homes enjoyed a 0.4% increase last month. This positive news was, however, tempered by comparisons to years past. Between November '06 and November '07, sales of preowned homes were down 20%, while the median price fell by 3.3%. Here's a sampling of the median cost of a preowned home since November, 2005:

• November 2005: $225,000
  
• November 2006: $217,300
  
• November 2007: $210,200 (preliminary data)

Nationwide, the inventory of preowned homes for sale fell from 4,433,000 to 4,273,000 units at the end of last month, which should help to stem the decline in prices.

Click here for historical prices and a chart.


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 94% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will elect to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the January 30^TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut to 7.0% at the January 30^TH 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. Odds may experience a significant shift on the release of the following economic report:

• Friday, January 4, 2008: The Labor Department releases the December Employment Situation Report.

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Odds On A Rate Cut for the January 30 Monetary Policy Meeting Now at 90%

The odds that the Fed will cut short-term interest rates next month jumped to 90% on Friday, after news of dismal November new home sales. According to the Commerce Department, new home sales fell by 9.0% last month. Furthermore, the modest advance of new home sales during September and October were revised downward. Between November '06 and November '07, sales of new homes declined by 34.4%.

Nationwide, the median price of a shiny new home was $239,100 during November, while the average price was $293,300. The number of new homes for sale at the end of last month fell from 519,000 to 509,000.

The cost of a newly built home peaked back in March of this year, when the median price was $262,600, and the average was $329,400 (click here for historical prices.)


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 90% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the January 30^TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut to 7.0% at the January 30^TH FOMC monetary policy meeting: 90% (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. Odds may experience a significant shift on the release of the following economic report:

• Friday, January 4, 2008: The Labor Department releases the December Employment Situation Report.

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Odds On A Rate Cut for the January 30 Monetary Policy Meeting Now at 76%

The Federal Reserve has been auctioning off big bundles of money to U.S. financial institutions in recent weeks, and news that the Fed will continue using its Term Auction Facility (TAF) to pump money into the banking system has caused the odds on a rate cut for next month to decline. The fed funds futures market, however, is still betting that the Fed will opt to lower short-term interest rates again on January 30.

The odds on a cut for the benchmark Fed Funds Target Rate at the next Federal Open Market Committee (FOMC) meeting are now at 76%. Influencing the futures market last week:

• On Wednesday, the U.S. Energy Information Administration (EIA) reported that crude oil inventories dropped by 7.6 million barrels during the week that ended on December 14. This puts upward pressure on prices at a time when Americans living in cooler climes are buying heating oil, and the Fed is already worried about rising prices.
  
• On Thursday, the Federal Reserve Bank of Philadelphia released its index of manufacturing conditions within the Fed's Third District. For December, the index came in at -5.7, while economists were expecting around +6.2. Any figure below zero indicates that manufacturing in the Fed's Philadelphia region is contracting, while a positive figure implies expansion. The Fed's Third District includes all of Delaware, parts of southern New Jersey, and a large portion of eastern Pennsylvania.
  
• The New York-based Conference Board released its report on the nation's leading economic indicators on Thursday. For November, leading indicators declined by 0.4%, while economists were expecting a decline of about 0.3%.
  
• The University of Michigan's Consumer Sentiment Index has been declining since September of this year. For December, the index came in at 75.5; the index was at 83.4 for September. Somber news from a consumer spending perspective. The baseline score of 100 is pegged to U.S. consumer sentiment during 1966.
  
• Then again, American consumers may keep on spending regardless of their concerns about the economy. According to the Commerce Department, consumer spending rose by 1.1% during November, the biggest increase in over three years. Great news for the U.S. and global economies, but increased spending also means upwards pressure on prices, and the Fed doesn't want to be forced into raising rates right after completing a rate-cut cycle.

The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 76% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the January 30^TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut to 7.0% at the January 30^TH FOMC monetary policy meeting: 76% (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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Odds On A Rate Cut for the January 30 Monetary Policy Meeting Now at 78%

On Wednesday, a day after the Fed cut short-term rates by 25 basis points, the fed funds futures market was certain that the Fed will cut short-term rates again at the next monetary policy meeting on January 30, 2008. As of right now, however, the odds on another cut for next month have dropped to 78%, thanks to a couple of gloomy reports on inflation.

On Thursday, the Labor Department reported that wholesale prices increased by 3.2% last month; Wall Street economists were expecting a rise of 1.6%. Ouch!

Earlier today, the Labor Department's report on consumer prices was released: the Consumer Prices Index (CPI) rose by a seasonally adjusted rate of 0.8% last month; core CPI, the Fed's preferred gauge, rose by 0.3%. The CPI has experienced a 4.3% increase since November, 2006.

With crude oil prices resuming their march back up toward the $100 per barrel mark, and with many economists predicting that the Fed will cut the Fed Funds Target Rate again next month, some are starting to talk seriously about the possibility of stagflation. Yikes!


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 78% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the January 30^TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut to 7.0% at the January 30^TH FOMC monetary policy meeting: 78% (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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U.S. Prime Rate Is Now 7.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its eighth and last 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 4.25%. Therefore, as of this afternoon, the U.S. Prime Rate is now 7.25%. Many American banks have already issued a press release announcing that their prime lending rate has been lowered from 7.50% to 7.25%.

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 4-1/4 percent.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

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

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. 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; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis..."

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A 25 Basis Point Rate Cut Is Currently The Most Likely Outcome for the December 11 FOMC Meeting

The Labor Department released the November jobs figures today, along with revised jobs numbers from October and September. According to the report, 94,000 new, non-farm payrolls were added to the American workforce last month. Not great, but not that bad either. October non-farm payrolls were revised up from 166,000 to 170,000, while September was revised down from 96,000 to 44,000. The unemployment rate held steady at 4.7% for the third-straight month.

The investors who trade in fed funds futures are still 100% certain that the Fed will cut the benchmark Fed Funds Target Rate on Tuesday; today's employment news caused the odds on a 50 basis point (0.50 percentage point) cut to drop to 24%, with the odds on a 25 basis point (0.25 percentage point) cut now at 76%.


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (according to current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the December 11^TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut by at least 25 basis points at the December 11^TH, 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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Odds On A 50 Basis Point Cut for December 11 Are Rising

According to current pricing on contracts, the fed funds futures market is still 100% certain that a rate cut is coming on December 11, and is now suggesting that the odds on a 50 basis point (0.50 percentage point) cut are now 40%, with the odds on a 25 basis point (0.25 percentage point) cut at 60%.

Odds experience a significant shift today after the Institute for Supply Management released the Purchasing Manager's Index (PMI) report for November. With the PMI, any figure above 50% suggests that U.S. manufacturing is expanding, while any figure below 50% suggests that manufacturing is contracting. The November PMI came in at 50.8%.

The PMI is a key economic report because American manufacturing generates around $1.6 trillion, or approximately 12% of U.S. gross domestic product (GDP).

Even though today's PMI report indicates that American manufacturing was expanding last month, the odds that the Fed will opt for an aggressive, 50 basis point cut increased, because the PMI has been declining since the end of the second quarter. Here are the PMI numbers since June of this year:

• June: 56.0%
• July: 53.8%
• August: 52.9%
• September: 52.0%
• October: 50.9%
• November: 50.8%

The trend is quite clear.


The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the December 11^TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut by at least 25 basis points at the December 11^TH, 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. Odds may experience a significant shift on the release of the following economic report:

• Friday, December 7, 2007: The Labor Department releases the November Employment Situation Report.

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