Futures Market 90% Certain U.S. Prime Rate Will Remain At 3.25% After The June 23 FOMC Monetary Policy Meeting

Which unemployment rate should we pay attention to? U-3 or U-6? U-3 is the headline or official unemployment rate, the one you hear when listening to business news. The Labor Department defines U-3 as:

"Total unemployed, as a percent of the civilian labor force"

Whereas U-6 is defined as:

"Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force"

U-3 is the headline, because it paints a rosier picture than the reality of the employment situation in the U.S. But why would you not take into account Americans who are unemployed, who need an income and who have given up looking for work? Makes no sense.

Here's how I see it. If you need an income, you're unemployed. If you have a job and don't have health insurance, you're unemployed. If you're working yet can't meet your most urgent financial obligations, like paying child support and your mortgage, then you're unemployed. That's why U-6 is the only gauge that matters.

Today the nation learned that the official unemployment rate (U-3) in the U.S. jumped from the January through March rate of 9.7% to 9.9% for April. The Labor Department put a positive spin on this by noting that the higher jobless figure was due to previously discouraged American workers getting off the couch and starting to look for work again. U-6 stood at 17.1% for April.

During April, American companies added 290,000 new jobs to their non-farm payrolls, while the new jobs figure for February and March were revised up to a total of 120,000.


It's been a while since we've seen the future market less than 100% certain that the Fed will keep short-term rates (including the U.S. Prime Rate) where they are, but it's still a safe bet that the Fed will remain on the sidelines for at least one more FOMC monetary policy meeting.

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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 June 23^RD, 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 June 23^RD, 2010 FOMC monetary policy meeting is adjourned: 90% (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.

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