United States Prime Rate

also known as the Fed, National or United States Prime Rate,
from the interest-rate specialists at www.FedPrimeRate.comSM

Friday, February 22, 2008

Odds On A 50 Basis Point Cut for Short-Term Rates Now at 96%

Currently, the fed funds futures market is nearly certain the Fed will cut short-term rates by 50 basis points (0.50 percentage point) on or before March 18, despite economic news this week that has many economists concerned about rising prices:

  • On Wednesday, the Labor Department released the Consumer Price Index (CPI) figures for January 2008. Consumer prices rose by 0.4% last month, while Wall Street economists were expecting an increase of 0.3%. From January 2007 through January 2008, the CPI increased by 4.3%: not a healthy figure.
  • The price on crude oil for future delivery closed at $98.81 today; crude topped $100 per barrel earlier this week. The price on New York Spot Gold closed at $944.60 earlier this afternoon.

On the flip side, contributing to the likelihood the Fed will cut by 50 instead of 25, the Federal Reserve Bank of Philadelphia reported yesterday that its diffusion index of current manufacturing activity in the Philadelphia area (the Fed's Third District) fell from -20.9 for January to -24.0 for this month. 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 section of eastern Pennsylvania.

As of right now, the fed funds futures market has odds at 96% that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) at or before the March 18TH Federal Open Market Committee (FOMC) monetary policy meeting. A 4% minority in the futures market are betting that the Fed will cut short-term rates by only 25 basis points at some point between now and March 18TH.

Summary of 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 25 basis points (0.25 percentage point) at or before the March 18TH, 2008 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 or before the March 18TH 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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