United States Prime Rate: A 50 Basis Point Cut Is Now More Likely Than A Quarter-Point Cut for January 30

Friday, January 04, 2008

A 50 Basis Point Cut Is Now More Likely Than A Quarter-Point Cut for January 30

Nonfarm payrolls advanced by 18,000 during December 2007, according to this morning's Labor Department report. Wall Street economists were expecting around 70,000 new jobs for last month. News that the unemployment rate jumped from 4.7% to 5.0% also surprised economists, many of whom were expecting the jobless rate to come in at 4.8%.

The investors who trade in fed funds futures reacted to today's employment report by raising bets that the Fed will opt for an aggressive cut on January 30. The futures market is still 100% certain that the Fed will lower the benchmark fed funds target rate at the end of the month; the odds on a 50 basis point (0.50 percentage point) cut are now at 68%, and the odds on a 25 basis point cut are currently at 32%.

Wall Street reacted bearishly to today's jobs report: the Dow Jones Industrial Average (DJIA) fell by 256.54 points (1.96%), the NASDAQ Composite lost 98.03 points (3.77%) and the S&P 500 declined by 35.53 points (2.46%). The yield on the 10-year treasury note fell to 3.854% and New York Spot Gold closed at $863.00 per ounce.

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% (as implied by 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 January 30^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 January 30^TH 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.

Labels: odds, prime_rate_forecast