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

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its fourth 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 United States Prime Rate (also known as the Fed, national or WSJ Prime Rate) will remain at the current 3.25%.

Here's a clip from today's FOMC press release:

"...Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.


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; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen..."

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Futures Market 100% Certain Prime Rate Will Hold At 3.25% After The June 24 FOMC Meeting

Back in March of this year, the Fed began buying long-term U.S. Treasury securities with a two-fold objective: a) increased demand would produce lower yields, which would in turn cause the rates associated with 15- and 30-year fixed-rate mortgages to decline, and b) lower yields would also stem the flow of capital to the safety of government debt by souring the Treasury security milk (the government would rather have capital moving to riskier investments like stocks and corporate debt, which would be much better for the economy.)

For a while, it looked like the Fed got exactly what it wanted with regard to mortgage rates. According to the mortgage giant Freddie Mac, the average rate on a 30-year fixed-rate mortgage was 5.47% on December 11, 2008. The average rate dropped below 5% during the winter and spring of this year, declining to 4.78% twice during April.

But now rates may be starting to trend upward. Earlier today, Freddie announced that the average mortgage rate rose from 4.91% last week to 5.29% for the seven-day period that ended today.

So if you've been sitting on the fence waiting for mortgage rates to bottom out before diving into the housing game, you may want to consider jumping in now.

Then again, you may want to take your chances and bet that rates will head south again in the future. That's because the Fed plans to continue buying mortgage-backed securities during the rest of 2009, and long-term Treasury securities into the fall of this year, which will keep downward pressure on rates.

Why Did Mortgage Rates Spike?

The average mortgage rate jumped because investors reacted positively to the not-as-bad-as-expected May employment situation report released by the Labor Department Friday. Wall Street economists were expecting non-farm payrolls to decline by 530,000 last month, but the figure for May came in at 345,000. 345K is still a lots of pink slips, but it’s the softest monthly decline since September of 2008. Investors saw this as sign that an economic recovery may be in the offing, and moved enough capital from the safety of government debt to cause bond yields to spike. As demand for bonds wanes, the yields associated with bonds rises, and as long-term bond yields rise, so do the rates on 30-year FRM's.

Investors are also worried that excessive government spending, combined with the Fed's quantitative easing (a.k.a. printing money), will erode the value of the dollar; that inflation will surge at a pace the Federal Reserve won't be able to manage easily, when the U.S. economy returns to prosperity. Inflation and a weak dollar are both anathema to bond investors.

Here is how the yield on the benchmark 10-year Treasury Note looked over the past 16 days:

• 5 Jun 2009: 3.86%
• 4 Jun 2009: 3.72%
• 3 Jun 2009: 3.55%
• 2 Jun 2009: 3.64%
• 1 Jun 2009: 3.71%
• 29 May 2009: 3.46%
• 28 May 2009: 3.67%
• 27 May 2009: 3.69%
• 26 May 2009: 3.49%
• 22 May 2009: 3.45%
• 21 May 2009: 3.35%
• 20 May 2009: 3.20%
• 19 May 2009: 3.24%
• 18 May 2009: 3.21%
• 15 May 2009: 3.12%
• 14 May 2009: 3.11%

Recent economic news that managed to seduce the bull out of recession-weary investors may well have been the siren song of an economic false dawn. During the Great Depression, there were many instances where the economy looked like it was getting better, when in fact economic conditions were only to get worse.

Home values across much of the country probably won't improve in a significant way during 2009, so whether you choose to get a FRM now or wait a few months, you're probably going to get a deal that'll have you smiling for a while.

Here's an interesting calculation from the good folks at Bloomberg.com (referring to this week's rate spike that Freddie announced today) :

"...This week’s rate increase translates into an additional $31.79 a month for a buyer purchasing the median-priced U.S. home of $170,200 with a 20 percent down payment..."

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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 June 24^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 June 24^TH, 2009 FOMC monetary policy meeting is adjourned: 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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FOMC Meeting Schedule (Tentative) for 2010

Earlier today, The Federal Open Market Committee (FOMC) released its tentative monetary policy meeting schedule for 2010. The FOMC doesn't always stick to the exact dates on the schedule (hence tentative), but they do always meet at least eight times per calendar year.

Why is this schedule important to you? Because it's at these monetary policy meetings that The FOMC votes on whether to raise, lower or make no changes to The Fed Funds Target Rate, and when the Fed Funds Target Rate changes, the U.S. Prime Rate (also known as the Fed, national or WSJ Prime Rate) will also change.

Here's the tentative schedule for 2010:

January 26 - 27, 2010

March 16, 2010

April 27 - 28, 2010

June 22 - 23, 2010

August 10, 2010

September 21, 2010

November 2 - 3, 2010

December 14, 2010

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