United States Prime Rate: 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.

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.

Labels: odds, prime_rate_forecast