Futures Market Now Certain The Fed Will Cut Rates By 50 Basis Points On January 30

Prime Rate Forecast - Predictions

There was good news from the distressed financial sector this week: Bank of America is buying mortgage-origination behemoth Countrywide Financial. Countrywide, which is the nation's #1 home-loan lender, has taken a beating in the wake of the subprime mortgage crisis, and there were rumors that the company might file for bankruptcy.

But the good news about Countrywide wasn't enough to keep the stock market from losing ground this week. In fact, since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) has lost 1,558.23 points (11.0%), while the S&P 500 has given up 164.13 points (10.487%). On Friday, New York Spot Gold crept closer to the $900 mark, and the yield on the 10-year treasury note fell to 3.81%.

Right now, the fed funds futures market thinks the economy is looking bad enough that the Fed will take aggressive action when the Federal Open Market Committee (FOMC) releases its decision on interest rates on January 30. The odds that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) are currently at a very confident 100%; the market is also betting, at 34% odds, that the Fed will either cut rates before the January 30 meeting, or they will opt for a 75 basis point cut at the end of the month. Those are some pretty intense odds.


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 vote to lower the benchmark Federal Funds Target Rate by at least 50 basis points (0.50 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 50 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 constantly changing, so stay tuned for the latest odds.

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