Prime Rate

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

Tuesday, March 25, 2008

Futures Market Certain The Fed Will Cut Rates Again on April 30

The Fed has cut short-term rates aggressively -- by 300 basis points (3.00 percentage points) since mid-September of last year -- in an attempt to inject vitality into the sluggish economy and help ease turmoil in credit markets. The Fed doesn't want to cut rates by too much, which could easily create another wave of asset bubbles in the future. According to current odds from the fed funds futures market, however, the Fed will cut again on April 30.

Recent economic news influencing the futures market:

  • Last Thursday, The Conference Board reported that the nation's leading economic indicators fell by 0.3% during February 2008, which is what Wall Street economists were expecting.
  • Also last Thursday, the Federal Reserve Bank of Philadelphia reported that its diffusion index of current manufacturing activity in the Philadelphia area (the Fed's Third District) came in at -17.4 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.
  • Yesterday, the National Association of Realtors® released its report on sales of previously owned homes for February. Though sales of previously occupied homes improved during February, the median and average price for a used home declined for the third straight month. According to preliminary estimates, the median price on a used home in the United States was $195,900, while the average price was $241,900.
  • Earlier today, The Conference Board reported that the Consumer Confidence Index (CCI) fell to 64.5 this month. Wall Street economists were expecting ~73.0. The CCI has been declining from month to month since last summer (the July 2007 figure was 111.9.) For the CCI, the baseline score of 100 is associated with 1985 survey results.

Right now, the fed funds futures market has odds at 66% that the Fed will cut the benchmark Fed Funds Target Rate by 25 basis points (0.25 percentage point) at the April 30TH FOMC monetary policy meeting. 34% are betting that the Fed will cut short-term rates by 50 basis points at the end of next month.


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 the April 30TH, 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 the April 30TH 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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Tuesday, March 18, 2008

U.S. Prime Rate Is Now 5.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its second, regularly scheduled monetary policy meeting of 2008, and has just lowered its target for the Federal Funds Rate by 75 basis points (0.75 percentage point) to 2.25%. Therefore, as of today, the U.S. Prime Rate is now 5.25%. Many American banks have already issued a press release announcing that their prime lending rate has been lowered from 6.00% to 5.25%.

Here's a clip from a press release issued by the FOMC earlier today:

"...The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco..."

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Monday, March 17, 2008

Fed Will Cut Short-Term Rates by At Least 100 Basis Points Tomorrow

Shares of the investment bank Bear Stearns fell 87% today to close at $4.81. The stock was at $145.49 on March 19, 2007. Though a rescue plan is in place for Bear (the company will likely be sold to JPMorgan Chase at a fire sale price), the Fed is still worried about the health of the financial sector. Confidence is evaporating fast, and the everyone is counting on the Fed to use its powers to help stabilize the system.

Credit markets need a serious boost, and the Fed will deliver. Yesterday, the FOMC lowered the discount rate by 25 basis points to 3.25%. In all likelihood, the FOMC will lower the Fed Funds Target Rate by at least 100 basis points tomorrow afternoon.

Right now, the fed funds futures market has odds at 84% that the Fed will cut the benchmark Fed Funds Target Rate by 100 basis points (1.00 percentage point) at the March 18TH FOMC monetary policy meeting. 16% are betting that the Fed will cut short-term rates by 125 basis points tomorrow.


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 100 basis points (1.00 percentage point) at 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 100 basis points at 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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Saturday, March 15, 2008

Short-Term Rates Very Likely to be Cut By At Least 75 Basis Points On Tuesday

With all the somber economic news in the business headlines lately, one thing is clear: the Fed wants to cut rates aggressively when the Federal Open Market Committee (FOMC) meets on March 18 (Tuesday.)

However, cutting short-term rates aggressively with the concurrent problem of rising prices could hurt the FOMC's credibility. For sure, no one wants a return of 1970's-style inflation.

How bad is inflation right now? Well, to get an idea: crude oil for future delivery finished the week at a staggering $110.21 per barrel, while New York Spot Gold ended the week at $1,002.50 per ounce.

The fed funds futures market is now indicating that the Fed may cut short-term rates by as much as 100 basis points (1.00 percentage point) on March 18. That's very, very aggressive. Is the Fed really going to execute such a large rate cut when so many prominent economists are worried about inflation? Yes, it is.

The Fed is very likely to cut by at least 75 basis points on Tuesday. The twofold justification for such a large cut came on Friday:

  • For some time, the FOMC has stated that it "expects inflation to moderate in coming quarters." The February 2008 Consumer Price Index (CPI) figures bear out the group's assertion. According to the Labor Department report, both the CPI and the core CPI advanced by less than 0.1% on a seasonally-adjusted basis last month. Bottom line: the CPI figures for February are, in essence, the Fed's license to cut aggressively on Tuesday.
  • The U.S. #5 investment bank Bear Stearns is strapped for cash. Bear Stearns stock price fell 47.37% on Friday to close @ $30.00 per share. A year ago, the stock was trading at $143.68. JPMorgan Chase bank borrowed money directly from the Federal Reserve via the Fed's discount window, and then lent that same cash to Bear. The Fed is assuming all the risk for this loan. Bear Stearns may be sold in the near future.
Is the U.S. economy already in recession? We'll have to wait until April 30 for the answer. That's when the Commerce Department is set to release the "advance" Gross Domestic Product (GDP) report for Q1, 2008.


Yesterday, the fed funds futures market had odds at 60% that the Fed will cut the benchmark Fed Funds Target Rate by 100 basis points (1.00 percentage point) at the March 18TH FOMC monetary policy meeting. 40% are betting that the Fed will cut short-term rates by 75 basis points on 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 75 basis points (0.75 percentage point) at 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 75 basis points at 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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Monday, March 10, 2008

Odds On A 75 Basis Point Rate Cut for March 18 Hit 96% On Weak Jobs Report

Thanks to a surprisingly anemic jobs report, and other economic news suggesting that a recession may be in the offing, the fed funds futures market is now 100% certain that the Fed will cut short-term rates by at least 75 basis points (0.75 percentage point) this month.

  • On Friday, the Labor Department reported that nonfarm payrolls declined by 63,000 during February 2008. Wall Street economists were expecting payrolls to advance by about 25,000. What's worse, the nonfarm payrolls figure for January was revised down from a loss of 17,000 jobs to a loss of 22,000. The latest employment figures have led many economists to believe that the U.S. economy is already in a recession.
  • The stock market recoiled in response to the February jobs report. Since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) is now 2,270.84 points (16.032%) lower, while the S&P 500 Index has shed 271.78 points (17.364%.)
  • The prospect of an imminent and aggressive rate cut from the Fed has precipitated a further weakening of the dollar and has helped to send crude oil prices to record highs. By Friday evening, one euro could be traded for $1.5356 in New York, while one dollar bought 0.6512 euro. The price on crude oil for future delivery closed at $105.15 per barrel.
  • On Monday, the Institute for Supply Management reported that the Purchasing Manager's Index (PMI) fell from 50.7% for January to 48.3% for February. Any figure above 50% suggests that, generally, U.S. manufacturing is expanding, while any figure below 50% suggests that the American manufacturing sector is contracting.
  • On Friday, the Federal Reserve announced that it will expand its Term Auction Facility (TAF) in a continuing effort to keep financial markets from seizing up.

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 75 basis points (0.75 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 100 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 75 basis points (0.75 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 75 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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