Futures Market 100% Certain U.S. Prime Rate Will Hold At 3.25% After The April 28 FOMC Monetary Policy Meeting

For certain, Americans are starting feel prosperous again.

Yesterday, the Commerce Department reported that consumer spending increased by 0.3% last month, the fifth-straight month in positive territory. Today, the Conference Board reported that its Consumer Confidence Index (CCI) rose from 46.0 for February to 52.5 for this month.

The Fed is going to cease buying mortgage-backed securities (MBS) tomorrow (Wednesday.) That, in turn, will likely cause mortgage rates to rise steadily over time. Not good news for the beleaguered housing market.

With the DJIA almost back to the 11,000 mark again, it's no wonder that Americans are feeling optimistic about their financial circumstances. So I guess it's time for a reality check, in the form of a bear-market update.

Since closing with record highs on October 9, 2007, the DJIA has now lost 3,257.11 points (22.995%), while the broader S + P 500 Index has shed 391.88 points (25.038%). The record high for the DJIA is 14,164.53; for the S + P 500 Index it's 1,565.15. Earlier today, the DJIA closed at 10,907.42, which is just about where is settled on June 7, 1999 (10,909.38).

Earnings season is just around the corner, and expectations are high. According to Thomson Reuters, companies in the S + P 500 Index are projected to report earnings growth of 36%, with revenue growth expanding by 10%. If the prognosticators got it right, we may see the DJIA reaching for 12,000 by Xmas 2010.

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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 April 28^TH, 2010 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 April 28^TH, 2010 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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Second FOMC Meeting of 2010 Adjourned: U.S. Prime Rate Remains At 3.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its second monetary policy meeting of 2010 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 Wall Street Journal® Prime Rate (also known as the U.S., national or Fed Prime Rate) will remain unchanged at the current 3.25%.

Here's a clip from today's FOMC press release (note the text in bold):

"...Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

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, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability..."

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