First FOMC Meeting of 2009 Adjourned: The Prime Rate Remains at 3.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its first monetary policy meeting of 2009 and, in accordance with our most recent forecast, has voted to leave short-term interest rates at their current levels. Therefore, the benchmark target range for the federal funds rate will remain at 0% - 0.25%, and the Wall Street Journal® Prime Rate (also known as the Fed or U.S. Prime Rate) will remain at the current 3.25%.

Here's a clip from the press release that has just been issued by the FOMC:

"...The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs..."

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Prime Will Remain At 3.25% After The FOMC Adjourns Its Monetary Policy Meeting Tomorrow

The fed funds futures market is now a bit less confident that the Fed will vote to leave short-term rates (including the U.S. Prime Rate) at their current levels tomorrow, but it's still a very safe bet that the Fed will leave short-term rates alone. Right now, the futures market has odds at 97% that the Federal Open Market Committee (FOMC) will vote to do nothing with short-term rates. 3% in the market are betting that the Fed will raise rates by at least 25 basis points (0.25 percentage point) tomorrow.

The futures market had plenty of economic news to digest over the past two weeks, and one of the most significant items was released today. [Drum Roll] We now have a new record low value for consumer confidence. Earlier today, The Conference Board reported that for January (this month) the Consumer Confidence Index (CCI) fell to 37.7, while last month's figure was revised down to 38.6. Wall Street was expecting a figure of around 39.0 for the current month. Bottom line: American consumer spending, a major driving force in the global economy, probably isn't going to pick up any time soon.

For the CCI, the baseline "100" score is pegged to 1985 survey data.

In all likelihood, the following recent economic news (including the above) had at least some influence on the fed funds futures market recently:

• A first for Microsoft: the company announced recently that up to 5,000 employees will receive pink slips over the next year and a half. Other major companies announcing layoffs recently: Home Depot, Caterpillar, Sprint Nextel, General Motors, Texas Instruments and Pfizer/Wyeth (pharmaceutical behemoth Pfizer is buying its rival Wyeth in a deal worth $68 billion.)
• On January 16, The Labor Department reported that consumer prices waned by 0.7% during December 2008. Consumer inflation advanced by a mere 0.1% from 12/07 through 12/08.
  
  The current disinflationary environment (sustained by a protracted recession, rising unemployment, low consumer confidence and consumer spending, continued home price depreciation, etc.) could blossom into full-blown deflation. Deflation is anathema to Fed economists, and rightfully so: watch how the unemployment rate skyrockets if deflation takes hold.
• Though there was a month-over-month advance for sales of previously occupied homes during December 2008 (+6.5%), prices continued on a downward trend. According to yesterday's report from the National Association of Realtors®, the median price of a preowned home fell to $175,400 last month, while the average price fell to $216,000. Both the median and average cost of a used home have declined each month since June 2008. Click here for historical prices and a chart.

• 2009 has barely had a chance to crawl out of bed, yet three banks have already failed since the start of this year. Twenty-five banks failed during 2008. For some perspective, 3 banks failed during all of 2007 and there were no bank failures during both 2005 and 2006.

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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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Futures Market 100% Certain Prime Rate Will Hold At 3.25% After The January 28 Fed Meeting

The fed funds futures market is now 100% certain that the Federal Open Market Committee (FOMC) will vote to leave short-term rates, including the U.S. Prime Rate, at their current levels at the January 28^TH, 2009 monetary policy meeting.

The futures market -- and all of America for that matter -- was expecting a dismal jobs report this morning, and the Labor Department did not disappoint. According to this morning's employment situation report for December, American, nonfarm businesses shed 524,000 jobs last month, and the unemployment rate jumped from the revised November figure of 6.8% to 7.2% for December. The decline in nonfarm payrolls during November, which was originally reported at 533,000, was revised up to 584,000. During December, the total number of jobless Americans rose by 632,000 to 11.1 million.

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

• How does the Fed feel about the employment outlook? For some insight, here's a clip from the minutes of the December 16, 2008 FOMC monetary policy meeting, which was issued last Tuesday:
  
  

  "...All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010. Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting. The disinflationary effects of increased slack in resource utilization, diminished pressures from energy and materials prices, declines in import prices, and further moderate reductions in inflation expectations caused the staff to reduce its forecast for both core and overall PCE inflation. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010..."

• Also from Tuesday, aluminum giant Alcoa announced that, by the end of 2009, it will issue pink slips to 13,500 employees (13% of its workforce) and will also cut 1,700 contractor jobs. Recently, companies representing a broad cross section of sectors announced plans to cut jobs, including the Bank of America, Boeing, GE Aviation, Schlumberger, Dupont, Walgreens, EMC Corporation and others.
• Another item from Tuesday: The U.S. Census Bureau, which is part of the Commerce Department, reported that factory orders declined by 4.6% during November 2008. Wall Street economists were expecting a decrease of around 2.5%.

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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 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: 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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