United States Prime Rate: Futures Market Still 100% Certain The Fed Will Cut Short-Term Rates On December 16

Prime Rate

The fed funds futures market ended the week 95% certain that the Fed will cut short-term rates by 50 basis points (0.50 percentage point) at the next Federal Open Market Committee (FOMC) meeting on December 16. The futures market isn't accustomed to dealing with a fed funds target rate that's very likely to go lower than the current 1.00%, so the 50 basis point cut that futures contracts are implying right now shouldn't be taken as foolproof. We can, however, be confident that the Fed will elect to cut rates by at least 25 basis points next month.

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

On Monday, the Institute for Supply Management reported that its Purchasing Manager's Index (PMI) declined for the fourth straight month, from 43.5% for September to 38.9% for October. The last time the PMI was at similar lows was way back in 1982.

For the PMI, 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.
Also on Monday, the Commerce Department reported that construction spending fell by 0.3% during September, and by 6.6% year-over-year.
On Tuesday, the U.S. Census Bureau reported that factory orders declined by 2.5% during September. Wall Street economists were expecting a decline of 0.7%.
Earlier today, the Labor Department reported that between the beginning of September and the end of October, the already frail U.S. economy shed another 524,000 jobs, and the unemployment rate jumped to 6.5%.
On Thursday, the Bank of England (BOE) cut its benchmark interest rate by a staggering 150 basis points (1.50% percentage points) from 4.5% to 3.0%. The BOE, which is England's central bank, hasn't cut its key interest rate that aggressively since 1981.

Also on Thursday, the European Central Bank (ECB) cut its benchmark rate by 50 basis points to 3.25%.
Crude oil for future delivery ended the week at $61.04 per barrel in New York, an exact match with the closing price on December 30, 2005. That's a decline of $84.25 (57.987%) since crude closed at $145.29 per barrel on July 4, 2008.
The effective fed funds rate, which is the actual rate (average) at which American commercial banks have been making overnight loans to each other via the Fed, was 0.37% today and was 0.24% last Friday, according to the Wall Street Journal. The target fed funds rate is currently 1.00%.
Bear Market Update: since closing with record highs on October 9, 2007, the DJIA has now lost 5,220.72 points (36.858%), while the broader S&P 500 Index has declined by 634.16 points (40.518%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15.

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.

Labels: odds, prime_rate_forecast