Prime Rate

also known as the Fed, National or United States Prime Rate,
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Friday, February 06, 2009

Futures Market 90% Certain Prime Rate Will Hold At 3.25% After The March 17 Fed Meeting

prime rate forecast Yesterday, the Labor Department reported that as of the week that ended on January 24, there were 4,788,000 Americans continuing to rely on unemployment benefits, which is a record-high. During the week that ended on January 31, there were 626,000 new claims for jobless benefits.

Earlier today, the Department of Labor delivered more somber news. During January, the unemployment rate jumped from 7.2% to 7.6%, and American nonfarm payrolls shrank by 598,000. Nonfarm payrolls have declined by 3.6 million since December 2007 (that's when this recession officially began.)

Right now, the fed funds futures market has odds at 10% that the Fed will opt to raise short-term rates, including the U.S. Prime Rate, by at least 25 basis points (0.25 percentage point) at the March 17TH Federal Open Market Committee (FOMC) monetary policy meeting. The remaining 90% of the market is betting that the fed will keep short-term rates at current levels after next month's meeting.

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

  • On Thursday, the Bank of England, which serves as the central bank for the United Kingdom, cut its benchmark interest rate by 50 basis points (0.50 percentage point) to 1.00%. This is an all-time, record low for the UK central bank, which was founded in 1694 to fund the war against Louis XIV's France.
  • On Monday, the Commerce Department reported that consumer spending declined by 1.0% during December 2008, while personal income waned by 0.2%.
  • Also from Monday, the Institute for Supply Management (ISM) reported that its Purchasing Manager's Index (PMI) was 35.6% during January. This was an improvement over the December figure of 32.9%, but still a strong indication that the U.S. manufacturing sector is in decline.

    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.
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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 90% (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 March 17TH, 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 March 17TH, 2009 FOMC monetary policy meeting adjourns: 90% (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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