Prime Rate

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

Friday, November 14, 2008

From The Fed Funds Futures Market: Fed Will Cut Its Benchmark Rate by At Least 0.25 Percentage Point on December 16

prime rate forecastThe fed funds futures market is still 100% certain that the Fed will cut the benchmark fed funds target rate by at least 25 basis points (0.25 percentage point) at the next Federal Open Market Committee (FOMC) meeting on December 16. An 84% majority in the market is betting that the Fed will cut by 50 basis points next month.

Factors that (likely) influenced the fed funds futures market this week:

  • The eurozone is in recession, having contracted for two straight quarters. The eurozone, i.e. the European nations that share the euro currency, is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, The Netherlands, Portugal, Slovenia, and Spain. It's the first recession for the eurozone since it's creation back in 1999.
  • Earlier today, the Commerce Department reported that U.S. food services and retail trade, also known as retail sales, declined by 2.8% last month. This was the sharpest retreat for retail sales since the government created the economic gauge back in 1992.
  • Across the country, there were 516,000 new claims for unemployment benefits last week, according to Thursday's report from the Labor Department. Wall Street economists were expecting around 482,000 new jobless claims.
  • At a speech before a central banking conference in Frankfurt, Germany, Fed boss Ben Bernanke made the following comments:

    "...The efforts by central banks around the world to increase the availability of liquidity, along with other steps taken by central banks and governments, have contributed to tentative improvements in credit market functioning. However, the continuing volatility of markets and recent indicators of economic performance confirm that challenges remain. For this reason, policymakers will remain in close contact, monitor developments closely, and stand ready to take additional steps should conditions warrant..."
  • The Federal Reserve has approved the proposal made by industrial loan company American Express to become a bank holding company.
  • The effective fed funds rate, which is the actual rate (average) at which American commercial banks made overnight loans to each other via the Fed, was last reported at 0.42%, and was 0.37% a week ago. The current target for the fed funds rate is 1.00%.
  • On Wednesday, the Federal Reserve reported the results of its latest, $150 billion money auction, also known as the Term Auction Facility. Sixteen banks were awarded loans that will mature on January 8, 2009. These banks will pay an interest rate of 0.528% when these loans mature.
  • Crude oil for future delivery ended the week at $57.04 per barrel in New York. That's a decline of $88.25 (60.741%) since crude closed at $145.29 per barrel on July 4, 2008.
  • Mortgage behemoths Fannie Mae and Freddie Mac announced plans to speed up loan modifications for Americans with mortgages that are already in default.
  • Bear Market Update: since closing with record highs on October 9, 2007, the DJIA has now lost 5,667.22 points (40.01%), while the broader S&P 500 Index has declined by 691.86 points (44.204%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15.

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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 16TH, 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 16TH, 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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