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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