Futures Market 97% Certain Prime Rate Will Hold At 3.25% After The January 28 Fed Meeting

On December 16, the Fed took the unusual and unprecedented step of setting a target range of 0% - 0.25% for the benchmark fed funds rate. With regard to short-term interest rates, the Federal Open Market Committee (FOMC) has virtually no place left to go but up. However, with the threat of deflation still looming over an economy in dire need of stimulus, the Fed will very likely opt to keep America's cardinal interest rate exactly where it is. The futures market currently has odds at 3% that the Fed will opt to raise its benchmark rate by at least 25 basis points (0.25 percentage point) on January 28, with 97% in the market betting that the Fed will vote to leave short-term rates alone.

In all likelihood, the following recent economic news had at least some influence on the fed funds futures market this week:

• According to the S&P/Case-Shiller Home Price indices released yesterday, home values took a significant turn for the worse at the start of the fourth quarter. Here are some notable price decline percentages in major U.S. cities for the October 2007 - October 2008 period:
  
  
  • San Francisco: -31.0%
  • San Diego: -26.7%
  • Phoenix: -32.7%
  • Miami: -29.0%
  • Los Angeles: -27.9%
  • Las Vegas: -31.7%
  • Detroit: -20.4%
    
    
    
• Also from yesterday, the Fed announced that at some point in early January it will start buying up mortgage-backed securities; you know, the ones now infamous for a) setting off the global financial crisis, b) contributing much to the development of the current recession and c) taking down some of America's most influential financial institutions.
  
  
• Again from yesterday, The Conference Board announced that its Consumer Confidence Index (CCI) declined to 38.0 for this month (December), which is a new, all-time low for this metric. Wall Street economists were expecting a reading of about 45.0. Clearly, this is not a good omen for consumer spending, which was the principal driving force behind the last economic expansion in the USA, the expansion which, technically speaking, ended exactly one year ago.
  
  The October, 2008 CCI figure was originally reported at 38.0 as well, but it was later revised up to 38.8. For some perspective: October was the month during which the current, global credit crisis peaked.
  
  For the CCI, the baseline "100" score is associated with 1985 survey data.
• Crude oil for future delivery finished 2008 at $44.60 per barrel in New York. That's a decline of $100.69 (69.303%) since crude closed at $145.29 per barrel on July 4, 2008.
  
  
• Bear Market Update: since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) has now declined by 5,388.14 points (38.04%), while the broader S&P 500 Index has shed 661.90 points (42.29%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15.
  
  
  For the year, the DJIA lost 4,488.43 points (33.837%), its worst yearly retreat since 1931. The S&P 500 has given up 565.11 points (38.486%.)
  
  
• One more item from yesterday: the Fed reported the results of its latest, $150 billion money auction, also known as the Term Auction Facility. There were 72 bidders this time around. These 83-day loans will mature on March 26, 2009 and will have an interest rate of 0.2% associated with them.
  
  
• The yield on the benchmark 10-Year Treasury Note ended the year at 2.244%, while the yield on the 13-week Treasury Bill finished 2008 at 0.115%.

If you've been waiting for the Prime Rate to bottom out, it's very likely your wait is over. The one- and three-month LIBOR rates, on the other hand, will likely shed a few more basis points (over time) before settling near the Fed's current upper limit for the fed funds target rate (0.25%.) Stay tuned to this chart for some perspective on how key benchmark rates are trending.

Of course, the LIBOR rates are constantly changing. Stay tuned to this blog for the latest LIBOR news.

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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 97% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the January 28^TH, 2009 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will remain at the current 3.25% after the January 28^TH, 2009 FOMC monetary policy meeting adjourns: 97% (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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