Prime Rate

also known as the Fed, National or United States Prime Rate,
from the interest-rate specialists at www.FedPrimeRate.comSM

Tuesday, August 11, 2009

Futures Market 100% Certain U.S. Prime Rate Will Hold At 3.25% After Tomorrow's Monetary Policy Meeting

prime rate forecastMoments ago, the Labor Department released its preliminary report on productivity and unit labor costs for the second quarter of 2009. Nonfarm productivity advanced by 6.4%, while unit labor costs declined by 5.8%. Both figures were annualized and better than what the majority of Wall Street economists were expecting. As you might have guessed, the gains were attributed to reduced hours and layoffs.

Increased productivity and cheaper labor are great news for businesses, as the combo often translates to higher profits. It's great news on a macroeconomic level as well, as it means the Fed doesn't have to worry about elevated labor costs and lower productivity placing upward pressure on inflation. Bottom line: the news gives the Fed more room to leave short-term rates at near zero for as long as it takes to get the economy back on track.

Back in the 1990's, computers and the Internet helped businesses become more productive, so much so that the Fed was able to keep short-term rates steady while the economy continued to grow and the jobless rate remained low. Without the increase in productivity, the Fed probably would have had to raise short-term rates between 1996 and 1999, to contain the inflation that very likely would have taken hold.

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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 tomorrow's monetary policy meeting.

Summary of the Latest Prime Rate Forecast:
  • Current odds that the Prime Rate will remain at the current 3.25% after tomorrow's 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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