Fourth 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 fourth 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 April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing 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 continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.

Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. 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.

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.

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 a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly..."

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Futures Market 100% Certain U.S. Prime Rate Will Remain At 3.25% After The June 23 FOMC Monetary Policy Meeting

Looks like Wall Street is loosing faith that the American economy can pull off a sustained and lasting recovery.

Earlier today, stocks reacted negatively to news that retail sales fell by 1.2% last month. Economists were expecting a rise of 0.2%.

Moreover, Wall Street money, which was starting to make it's way back to stocks and other relatively risky investments, now seems to be turning back to the safety of government debt. The yield on the 3-month US Treasury Bill fell to 0.07% moments ago. It was as high as 0.17% as recently as May 19 of this year.

The yield on the benchmark 10-Year Treasury Note fell to 3.22% today. It was 3.90% as recently as April 8 of this year.

New York Spot Gold is currently trading at $1,226.50 per ounce. Yikes! It was $938.30 per ounce about a year ago (June 12, 2009.)

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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 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: 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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Futures Market 98% Certain U.S. Prime Rate Will Remain At 3.25% After The June 23 FOMC Monetary Policy Meeting

Canada Raises Rates

Yesterday, Canada's central bank -- the Bank of Canada -- raised its key, short term interest rate by 25 basis points (0.25 percentage point.) Canada is the first G-7 nation to raise short-term rates since the banking crisis and subsequent Great Recession prompted central banks around the world to cut rates to record-low levels. The move by the Bank of Canada also ends the game of chicken that's been going on between the world's most powerful economies.

Included in the G-7: The United States, Japan, Germany, France, the United Kingdom, Italy and Canada.

Australia's central bank -- The Reserve Bank of Australia (RBA) -- began a cycle of rate hikes back on October of 2009.

US Manufacturing Continues to Expand

Also from yesterday: the Institute for Supply Management reported that its Purchasing Manager's Index (PMI) declined from 60.4 for April to 59.7% for May. A decline may seem negative but this is actually positive news. That's because for the PMI, any figure above 50% suggests that, in general, the American manufacturing sector is expanding, while any figure below 50% suggests contraction.

According to the PMI, American manufacturing has been in expansion mode since August of 2009. The PMI hit rock bottom during the height of the global banking crisis: it was 32.5% during December of 2008. Not quite a record low, but close. It was 30.3% during June of 1980.



Again from yesterday, the Commerce Department reported that construction spending rose by 2.7% last month. For a better perspective on how well the American construction sector is doing, however, best to have a glance at this chart:


Yep.

The above charts: courtesy Econoday.

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Of course, futures markets reacted to the above news. As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 98% (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: 98% (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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