Prime Rate

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

Tuesday, September 16, 2008

Futures Market 98% Certain The Fed Will Cut Short-Term Rates Today

Fed rate decision: uncertainThe futures market is pushing hard for a rate cut today, but most Wall Street economists believe that the Fed will leave short-term rates unchanged when the Federal Open Market Committee (FOMC) adjourns its monetary policy meeting later this afternoon. So, even though the fed funds futures market is nearly 100% certain that the Fed will cut rates at 2:15 pm EST, in reality, the odds are about 50/50.

The reason for the uncertainty: the fate of insurance giant American International Group (AIG) is still unknown. Wall Street has no idea if AIG will be forced to declare bankruptcy or become the next major American financial institution to be rescued by a Fed-brokered bailout. Though nobody is willing to lend money to AIG, a rescue is the more likely scenario, since the company is solvent.

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As of Monday evening, the investors who trade in fed funds futures at the Chicago Board of Trade had odds at 98% (as implied by current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at today's monetary policy meeting.


Summary of the Latest Prime Rate Forecast:
  • Current odds the Prime Rate will be cut by at least 25 basis points at today's
    FOMC monetary policy meeting: 98% (very 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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