Futures Market 88% Certain Prime Rate Will Remain at 5.00% After September 16 Fed Meeting

The fed-funds futures market had a number of attention-grabbing bits of economic news to digest this week:

• From the Commerce Department: construction spending fell by 0.6% during July, while new orders for manufactured goods advanced by 1.3% during the same month.
  
• On Tuesday, the Institute for Supply Management reported that its Purchasing Manager's Index (PMI) declined from 50.0 for July to 49.9% for August. This 0.1% difference may seem insignificant, but any figure above 50% suggests that, in general, the American manufacturing sector is expanding, while any figure below 50% suggests contraction. So, between the beginning of July and the end of August, American manufacturing went from stagnant to shrinking.
  
• During the second quarter of 2008, non-farm productivity increased by 4.3%, while unit labor costs declined by 0.5%, according to a report released by the Labor Department on Thursday. Without a doubt, this is good news for American corporations and business owners: that guy or gal in the corner office is always looking for ways to run a more efficient shop and thus improve the company's bottom line. This particular piece of economic news isn't positive from a consumer spending perspective, however, since it implies that American workers were more productive while at the same time earned less money.
  
• Earlier today, the Labor Department reported that the American economy shed another 84,000 jobs last month, and the unemployment rate jumped from 5.7% for July to 6.1% for August. The last time the U.S. economy actually added jobs was back in December of 2007.
  
• A few hours ago, crude oil for future delivery ended the week at $106.23 per barrel. Crude hit a record high of $147.27 on July 11; that's a decline of $41.04 (27.867%.)
  
• Wall Street money continued to move to the safety of U.S. Treasuries this week. The yield on the 10-Year Treasury Note fell from 3.813% on August 29 to 3.66% today.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 88% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark Federal Funds Target Rate at the current 2.0% at the September 16^TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will remain at the current 5.0% after the September 16^TH, 2008 FOMC monetary policy meeting: 88% (likely)
  
• Current odds that the Prime Rate will remain at the current 5.0% after the October 29^TH, 2008 FOMC monetary policy meeting: 85% (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 constantly changing, so stay tuned for the latest odds.

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