Prime Rate

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

Sunday, August 29, 2010

Will The Prime Rate Remain at 3.25% for the Rest of the Year?

prime rate forecastThe Federal Reserve (The Fed) has been doing all it can to boost the economy, from lowering short-term borrowing rates to record-low levels, to buying Treasury and mortgage-backed securities. But the Fed can only do so much. In fact, despite the Fed’s efforts, the economy is still sputtering at best, and may be headed for another downturn at worst.

And that’s why the Prime Rate will remain at 3.25% for the rest of 2010. The Fed isn’t going to do anything to hinder the already weak-kneed economy, and therefore won’t raise the cost of borrowing until economic growth, the employment situation and inflation are all looking much better than they are today.

So how did Prime drop to 3.25%, a level not seen since 1955?

At the end of 2008, in response to the worst banking crisis in generations, and in a futile effort to stave off what would become the Great Recession, the Fed lowered it’s cardinal short-term interest rate, the target federal funds rate, to a range of 0% - 0.25%, which is essentially as low as it can go. This, in turn, caused the US Prime Rate to drop to 3.25%. Since 1994, the United States Prime Rate has been pegged to the fed funds target rate. Calculating Prime is easy: all you need do is add 3 percentage points to the target fed funds rate.

American banks and financial institutions often use the US Prime Rate in the pricing of credit cards, loans and other financial products. Read the terms and conditions of a typical credit card or loan and chances are the interest rate will be variable and indexed to Prime. Not all credit cards are indexed to the Prime Rate, but the vast majority are.

For the American consumer, the fact that Prime won’t rise any time soon is very good news. It means that, for most consumers, the interest rate on existing credit-card debt will remain as low as it can possibly be. It also means that, for most, new credit-card spending will incur the lowest possible finance charges if the cardholder can’t – or chooses not to -- payoff the entire balance at the end of the month.

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Wednesday, August 25, 2010

Futures Market 100% Certain U.S. Prime Rate Will Remain At 3.25% After The September 21 FOMC Monetary Policy Meeting, And The Rest of 2010

prime rate forecastIf you've got plenty of money in the bank and you're in the market for a new house, then this week's housing news is music to your ears. If you've been sitting on the fence for a while, waiting for prices to drop, then you might want to wait a little longer. Prices are likely to head further south, as inventories are rising, the American foreclosure pandemic is still with us and there is currently no talk of a new homebuyer tax credit.

For those unnumbered Americans who own homes and upside down with their mortgage, this week's news is quite depressing.

Yesterday, the National Association of Realtors® reported that sales of existing homes dropped by 27.2% last month. Here's the most important quote from yesterday's report:

"...Sales are at the lowest level since the total existing-home sales series launched in 1999, and single family sales – accounting for the bulk of transactions – are at the lowest level since May of 1995..."
To see how prices are doing, click here to view a history and chart.

Of course, these numbers offer a very broad view of how existing home sales are doing across the country. I have a friend who lives in the suburban Philadelphia who can easily profit by about $100,000 if she decided to sell right now. That's based on the only numbers that matter: recent sales of comparable homes in her neighborhood.

Today, the Commerce Department reported that sales of newly built homes sank by 12.4% last month, and dropped by 32.4% when comparing July of 2010 to to July of 2009. Prices declined as well: the median cost of a new home dropped from $217,000 to $204,000, while the average price dropped from $248,300 to $235,300.

click here to view a history and chart

Here's an interesting WSJ video with some insightful analysis:





There are 3 more Federal Open Market Committee (FOMC) monetary policy meetings this year: September 21, November 3 and December 14. Currently, the fed funds futures market is 100% certain that the Fed won't raise short-term rates at the next monetary policy meeting, and for the rest of the year.

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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 September 21ST 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 September 21ST, 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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Tuesday, August 10, 2010

Fifth FOMC Meeting of 2010 Adjourned: U.S. Prime Rate Remains At 3.25%

FOMC votes to leave short-term rates unchanged; Prime Rate holds at 3.25%The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its fifth 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 U.S. Prime Rate (also known as the WSJ, 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 June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. 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 more modest in the near term than had been anticipated.

Measures of underlying inflation have trended lower in recent quarters and, 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 help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.

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 was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee's ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve's holdings of longer-term securities at their current level was required to support a return to the Committee's policy objectives..."

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Wednesday, August 04, 2010

Futures Market Still 100% Certain U.S. Prime Rate Will Remain At 3.25% After The August 10 FOMC Monetary Policy Meeting

Slow Economy Ahead
Slow Economy Ahead
Double-dip recession? More likely than unlikely, in my opinion. Scarcity of credit, stubbornly high unemployment, falling prices, commercial mortgage defaults, massive national debt...and the list goes on. US states are in serious trouble, and no state can simply print more money out of thin air the way the Fed can.

And while we're on the topic of printing money (a.k.a. quantitative easing), it looks like the Fed may have to return to doing just that in order to avoid years of stagnant growth and falling prices, a la Japan.

Japan, despite super-low interest rates and quantitative easing, has been dealing with anemic economic expansion and deflation, sprinkled with the odd recession here and there, for the past 20 years. Japan's stock market has yet to return to its 1989 peak, and it has a loooong way to go. The Nikkei 225 closed @ 38,915.87 on December 29, 1989. The Nikkei is currently @ 9,489.34.

Japanese central bankers made the mistake of using freshly minted cash to prop up zombie companies and banks. They should have done a better job of spreading the cash around.

It's very clear that keeping the fed funds target rate near zero isn't going to be enough to reflate the American economy. The Fed is going to have to get more aggressive, and creative.

St. Louis Fed boss James Bullard recently produced a paper on this. Here's a quote from the abstract:

"...The FOMC's extended period language may be increasing the probability of a Japanese-style outcome for the U.S., and (2) on balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome..."

I say: start the presses! But forget about dumping cash in places where it won't move. Buying long term US Treasury securities isn't going to get the economy going. Neither is buying toxic mortgages. Sure, it'll keep mortgage rates low, but the housing market is so messed up that we simply can't depend on it to make Americans feel prosperous and wealthy enough to start spending again.

Like the Nikkei, housing has a looooong way to go.

As for the banks: they continue to fail left and right, while the ones that are making it are in total survival mode, i.e. they're being extremely stingy with lending.

I say give every tax-paying American family $5,000 and strongly urge them to spend it on American goods and services. Crazy? I don't think so. And, it could even end up being a cheaper solution than all the stimulus that's been tried so far. The Treasury department could spread the $5,000 over 5 months, or $1,000 per month. Treasury would limit the money to families, but even if every taxpaying American got a check, the cost of the program would be $690 billion (as of 2007 there were 138 million taxpayers in the U.S.) Cheaper than the original cost of the TARP; way cheaper than that arbitrary war in Iraq.

And here's how to create jobs: give every business a nice chuck of change for every new hire. On top of that, offer cash for converting temporary workers to full-time employees. That'll get the unemployment rate down, fast.

Oh, and abolish all Small Business Administration (SBA) loan programs. For most businesses that need cash, these programs simply don't work. Start from scratch with a new agency that guarantees business loans, but also has a simple application process. Is "government" and "simple" akin to oil and water? Perhaps. But it doesn't have to be, especially with the menace of the double-dip looming over the American economic landscape.

Start the presses!

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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 August 10TH 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 August 10TH, 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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