Prime Rate

also known as the Fed, National or United States Prime Rate,
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Wednesday, June 02, 2010

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

prime rate forecastCanada 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.

ISM Manufacturing Index

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:

US construction spending: April 2010
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 23RD, 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 23RD, 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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