Futures Market 100% Certain The Fed Will Cut Short-Term Rates Again On December 16

Former Federal Reserve Chairman Alan Greenspan has had to contend with lots of criticism for keeping the benchmark fed funds target rate (FFTR) at 1.00% for too long. The Greenspan Fed cut the FFTR to 1.00% on June 27, 2003, and kept it there until July 1, 2004. Some economists believe all that exceptionally cheap money that was sloshing around in the economy 5 years ago contributed to the financial mess we find ourselves in today.

So now, the big question: is the Bernanke Fed willing to take the FFTR below 1.00% in an effort to stave off a long and painful recession? According to the fed funds futures market, the answer is a firm yes. The futures market is currently 100% confident that the Fed will opt to cut short-term rates again at the next Federal Open Market Committee (FOMC) meeting on December 16, with a majority in the market betting on another 50 basis point (0.50 percentage point) cut.

Here are some factors that (likely) influenced the futures market this week:

• On Tuesday, The Conference Board® reported that its Consumer Confidence Index (CCI) fell to 38.0, the lowest level ever for the metric. For the CCI, the baseline "100" score is pegged to 1985 survey data.
  
  Earlier today, the University of Michigan reported that its Consumer Sentiment Index fell from 70.3 for September to 57.6 for October. The baseline "100" score is pegged to 1966 survey data.
  
• On Monday, the Commerce Department reported that the median cost for a newly built home fell from $220,400 for August to $218,400 during September. Click here for historical prices and a chart.
  
• On Thursday, the Commerce Department reported that the Gross Domestic Product declined by 0.3% during the third quarter of this year.
  
• Earlier today, the Commerce Department reported that consumer spending fell by 0.3% during September.
  
• Late this afternoon, JP Morgan Chase, the second largest bank holding company in the United States, announced that:
  
  

  "...it is expanding its already significant mortgage modification program by undertaking multiple initiatives designed to keep more families in their homes, including extending its modification programs to WaMu and EMC customers..."

  
  Here's another snippet from today's press release:
  

  
  "...The enhanced program is expected to help 400,000 families - with $70 billion in loans - in the next two years. Since early 2007, Chase, WaMu and EMC have helped about 250,000 families - with $40 billion in loans -- avoid foreclosure, primarily by modifying their loans or payments. Both the existing and enhanced programs apply only to owner-occupied properties with mortgages owned by Chase, WaMu or EMC, or with investor approval.
  
  Chase inherited pay-option ARMs when it acquired WaMu's mortgage portfolio last month and EMC's portfolio earlier this year as part of the Bear Stearns acquisition. After reviewing the alternatives that were being offered to customers, Chase decided to add more modification choices. All the offers will eliminate negative amortization and are expected to be more affordable for borrowers in the long term..."

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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 100% (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 the December 16^TH, 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 December 16^TH, 2008 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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U.S. Prime Rate Is Now 4.00%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its seventh scheduled monetary policy meeting of 2008, and, in accordance with the latest forecast, has just lowered its target for the Federal Funds Rate by 50 basis points (0.50 percentage point) to 1.00%. Therefore, as of today, the U.S. Prime Rate is now 4.00%.

Here's a clip from a press release issued by the FOMC moments ago:

"...The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act 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; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 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, Cleveland, and San Francisco..."

Many American banks have already issued a press release announcing that their prime lending rate has been lowered from 4.50 to 4.00%.

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Futures Market 100% Certain Fed Will Cut The Prime Rate on Wednesday

The fed funds futures market is still 100% certain that the Fed will cut short-term rates, including the U.S. Prime Rate, by at least 25 basis points (0.25 percentage point) on Wednesday. Here are some items that probably has some influence on the futures market this week:

• Earlier today, the National Association of Realtors® reported that sales of existing homes ticked up by 5.5% last month, but home prices fell. The median cost for a preowned home fell from $203,100 for August to $191,600 during September. The average price for a used home fell from $245,400 for August to $234,700 during September. Click here for historical prices and a chart.
  
• Since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) has now lost 5,785.58 points (40.846%), while the broader S+P 500 Index has given up 688.38 points (43.982%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15.
  
• In New York, crude oil for future delivery closed at $64.15 per barrel earlier today. That's a retreat of $42.74 (39.985%) since crude closed at $106.89 per barrel on September 26, 2008.
  
• On Wednesday, the Federal Reserve announced that it's going to raise the interest rate paid to banks that have excess balances on deposit at the Fed.

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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 100% (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 the October 29^TH, 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 October 29^TH, 2008 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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Fed Boss Ben Bernanke Thinks Congress Should Consider Another Stimulus Package

Stimulus

The rate cut that is very likely to occur on October 29 will be very welcome for businesses and consumers looking for loans and favorable credit card deals, and for those struggling with debt. The odds that the Fed will opt to cut short-term rates by at least 25 basis points (0.25 percentage point) at the end of the month are still 100%, and the odds of a 50 basis point cut for October 29 cut have been increasing as the next Fed meeting approaches.

Rate cuts are great for boosting economic activity, but another stimulus package could do even more for this anemic U.S. economy, especially since many American banks have responded to the current credit crisis by hoarding the capital in their vaults instead of lending it out.

If you've been hoping for another stimulus package from Congress, then you'll like what Fed Boss Ben Bernanke had to say before the Committee on the Budget of the U.S. House of Representatives earlier today. Here's a clip:

"...I understand that the Congress is evaluating the desirability of a second fiscal package. Any fiscal action inevitably involves tradeoffs, not only among current needs and objectives but also--because commitments of resources today can burden future generations and constrain future policy options--between the present and the future. Such tradeoffs inevitably involve value judgments that can properly be made only by our elected officials. Moreover, with the outlook exceptionally uncertain, the optimal timing, scale, and composition of any fiscal package are unclear. All that being said, with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate..."

And here's what House Speaker Nancy Pelosi had to say about Ben Bernanke's remarks:

“...Chairman Bernanke made it clear that a new economic recovery package is critical to boost our weakening economy. In testimony today before the House Budget Committee, Chairman Bernanke added his voice to the chorus of economists, experts and policymakers who insist that America needs a job-creating recovery package to get our economy back on track and to restore consumer and investor confidence..."

“...At a time when Americans are struggling with rising costs and weakened retirement security, and a growing number of workers are losing their jobs, I call on President Bush and Congressional Republicans to once again heed Chairman Bernanke’s advice and as they did in January, work with Democrats in Congress to enact a targeted, timely, and fiscally responsible economic recovery and job creation package...”

Some in Congress want the new stimulus checks to be twice as large as the ones issued earlier this year, but considering the cost, it's tough to predict whether a new package would include bigger checks for American consumers. Stay tuned.

Here are some video clips from Ben Bernanke's comments earlier today:







Another piece of positive news today: the TED spread was 3.62875 percentage points on Friday. Today it declined to 2.82875 points, which is a strong indication that the frozen credit market are starting to thaw.

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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 100% (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 the October 29^TH, 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 October 29^TH, 2008 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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Tame Inflation Gives Fed Room To Cut Short-Term Rates Again At The October 29 Fed Meeting

Inflation

The week's economic reports as well as a sharp decline in crude oil prices give the Fed plenty of room to cut short-term interest rates again at the October 29 Federal Open Market Committee (FOMC) meeting:

• On Wednesday, the Labor Department reported that the Producer Price Index (PPI) declined by 0.4% during September; on Thursday, it reported that the Consumer Price Index (CPI) for September was flat, i.e. consumer price moved sideways last month.
  
• Also on Wednesday, the Commerce Department reported that retail sales declined by 1.2% during September. Wall Street economists were expecting a dip of about 0.6% for last month.
  
• On Thursday, the Federal Reserve Bank of Philadelphia reported that its diffuse index of current manufacturing conditions declined to -37.5 this month. Wall Street economists were expecting the index to come in at around -10.0 for October. Also from the Fed on Thursday: industrial production declined by 2.8% during September. Wall Street economists were expecting a retreat of about 0.5%.
  
• On Friday, the Commerce Department reported that housing starts declined by 6.3% last month, while building permits declined by 8.3%.
  
• In New York, crude oil for future delivery closed at $71.85 per barrel. That's a decline of $35.04 (32.781%) since crude closed at $106.89 per barrel on September 26.

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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 100% (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 the October 29^TH, 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 October 29^TH, 2008 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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Futures Market 100% Certain Fed Will Cut Short-Term Rates Again At The October 29 Fed Meeting

As defined by Wikipedia.org, a stock market crash is:

"...[a] double-digit percentage losses in a stock market index over a period of several days..."

The stock market crashed this past week. For the week, the Dow Jones Industrial Average (DJIA) lost 1,874.19 points (-18.151%) to close at 8,451.19, while the NASDAQ Composite Index gave up 297.88 points (-15.296%) to close at 1,649.51. The S+P 500 Index declined by 200.01 points (-18.195%) to close at 899.22.


Also from Wikipedia.org, a bear market is thus defined:

"...a bear market is not a simple decline, but a substantial drop in the prices of the majority of stocks in a given market over a defined period of time. According to The Vanguard Group, "While there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period..."

And now for the bear-market update.

Since closing with record highs on October 9, 2007, the DJIA has now lost 5,713.34 points (40.336%), while the S&P 500 Index has declined by 665.93 points (42.547%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15. The DJIA was reconfigured recently.

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The NASDAQ Composite is a unique, tech-heavy index, so we won't include it in the bear market update. Heck: let's do the numbers for NASDAQ anyway, just for fun.

The record high for the NASDAQ Composite Index -- 5,048.62 -- was set on March 10, 2000; it finished the week at 1,649.51. That's a decline of 3,399.11 points (67.328%).


Banks are still extremely wary of lending to other banks, despite the highly coordinated round of rate cuts executed by central banks across the industrialized world on Wednesday. We can find the best evidence of this by observing where the Eurodollar LIBOR rates ended the week. The 3-Month LIBOR yield finished the week 0.31875 percentage point above the U.S. Prime Rate, and an extraordinary 4.63875 percentage points above the yield on the 3-Month Treasury Bill (click here to learn about the TED Spread.) Translation? Banks across the globe see default risk everywhere, and are therefore very reluctant to lend money. The money is there, they're just hoarding it.

The only good news this week? The cost associated with filling your car or truck with gas or diesel is very likely to decline significantly within the next few business days. Crude oil for future delivery ended the week at $77.70 per barrel in New York; that's a decline of $29.19 (27.308%) since the price on light, sweet crude closed at $106.89 per barrel on September 26, 2008.

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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 100% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the October 29^TH, 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 October 29^TH, 2008 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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U.S. Prime Rate Is Now 4.50%

Prime Rate Cut

The Federal Open Market Committee (FOMC) of the Federal Reserve, in an unscheduled monetary policy meeting, but in accordance with the latest forecast, has just lowered its target for the Federal Funds Rate by 50 basis points (0.50 percentage point) to 1.50%. Therefore, as of today, the U.S. Prime Rate is now 4.50%.

Here's a clip from a press release issued by the FOMC moments ago:

"...The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.

The Committee will monitor economic and financial developments carefully and will act 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; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-3/4 percent. In taking this action, the Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Boston..."

Many American banks have already issued a press release announcing that their prime lending rate has been lowered from 5.00 to 4.50%.

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The Federal Reserve Is Changing With The Times

Is it possible that the global financial crisis could produce a painful global depression? Yup, and the Fed knows it. The Federal Reserve is adapting to the current economic environment by making very significant changes to its own rules and regulations:

• Banks can now earn interest on the required and excess cash reserves they have with the Fed. Here's a clip from yesterday's press release:
  
  

  "...The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008.
  
  Employing the accelerated authority, the Board has approved a rule to amend its Regulation D (Reserve Requirements of Depository Institutions) to direct the Federal Reserve Banks to pay interest on required reserve balances (that is, balances held to satisfy depository institutions’ reserve requirements) and on excess balances (balances held in excess of required reserve balances and clearing balances)..."

• The commercial paper market -- where unnumbered American companies go to get short-term loans for things like payroll and inventory -- has all but seized up as a result of the credit crisis. In an effort to unfreeze this market, the Fed is now in the business of buying both unsecured and asset-backed commercial paper directly from eligible issuers. Here's a clip from today's press release:
  
  

  "...The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper, especially at longer-dated maturities. As a result, the volume of outstanding commercial paper has shrunk, interest rates on longer-term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day. A large share of outstanding commercial paper is issued or sponsored by financial intermediaries, and their difficulties placing commercial paper have made it more difficult for those intermediaries to play their vital role in meeting the credit needs of businesses and households...."

In other Fed news: in a speech today, Ben Bernanke provided a pretty strong hint that a cut for short-term interest rates is on its way. Here's a clip from today's speech:

"...Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate..."

Is this a good time for a bear market update? Sure, why not. Since closing with record highs on October 9, 2007, the DJIA has now lost 4,717.42 points (33.304%), while the broader S&P 500 Index has shed 568.92 points (36.349%.), as of today's close.

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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 100% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at or before the October 29^TH, 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 October 29^TH, 2008 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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Futures Market Still 100% Certain Fed Will Cut The Prime Rate At Or Before The October 29 Fed Meeting

Last Friday, Congress enacted a new law that will allow the federal government to buy the unpriceable and unwanted debt that has caused turmoil in financial markets around the globe. Despite the new law, and despite a recent and significant decline in crude oil prices, foreign and domestic equities declined on Friday and today.

It's not just the difficult mix of problems in global credit markets that are dragging stocks down. Recent and discouraging economic data are also playing a roll:

• Last Friday, the Labor Department reported that the already anemic U.S. economy got weaker by 159,000 jobs last month. Wall Street economists were expecting a decline of about 100,000 jobs for September.
  
• Last Wednesday, the Institute for Supply Management reported that its Purchasing Manager's Index (PMI) declined precipitously; from 49.9% for August to 43.5% for September. Any figure above 50% suggests that, in general, the American manufacturing sector is expanding, while any figure below 50% suggests contraction for a particular month.
  
• Last Thursday, the U.S. Census Bureau reported that factory orders declined by 4.0% during August. Wall Street economists were expecting a decline of 2.5%.

Bear Market Update
Since closing with record highs on October 9, 2007, the DJIA has now declined by 4,209.03 points (29.715%), while the S&P 500 Index has lost 508.26 points (32.474%.)

Crude oil for future delivery is currently trading at $88.74 per barrel; that's a decline of $58.53 (39.74%) since crude hit a record high of $147.27 per barrel on July 11.

Wealth continues to flow to the safety of U.S. Treasuries. The yield on the benchmark 10-Year Treasury note fell to 3.426% earlier 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 100% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at or before the October 29^TH, 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 October 29^TH, 2008 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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