2012 Prime Rate Forecast: Prime Very Likely To Remain At 3.25% All Year

Since August 9, 2011, the Federal Open Market Committee (FOMC) has included the following language in each post-monetary-policy-meeting press release:

"...The Committee currently anticipates that economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013..."

This means that the U.S. Prime Rate, which is the fed funds target rate plus 3 points, is very unlikely to rise during all of 2012. And, of course, Prime can't go any lower since, at 3.25%, it's already at rock bottom.

America's central bank is unique in that it has a dual mandate: keep prices stable and keep the unemployment rate as low as possible (maximum employment.) If the Fed were like many other central banks that only have to worry about keeping prices stable, then there is no way it could send such a powerful, long term signal to markets (near-zero rates for 2 years.) However, Congress decided to complicate the Fed's mission by making it a pseudo-political organization, and that's the way it is. When 200,000+ jobs are being created month after month, then the Fed will start thinking about raising short-term interest rates. Until then, it's cheap money for American banks, businesses, credit-card borrowers, etc.

So, you savers out there who are tired of extremely weak returns on your saving accounts and CD's: don't blame Ben Bernanke. He's just doing what he's supposed to do, according to the Fed's mandate.

Mortgage Rates

The Fed doesn't control mortgage rates like it does the Prime Rate. Rates on 30-year, fixed-rate mortgages track very closely with the yield on the 10 Year US Treasury Note.

But since:

• economic growth is probably going to remain tepid for many more months, and
• inflation expectations are tame, and
• Wall Street money continues to be very keen on finding shelter under the copper roof that is US government debt

mortgage rates are likely to remain extremely favorable for solid borrowers during 2012.

The Ten-Year Treasury yield was 3.31% at the end of 2010. It ended 2011 @ 1.87%.

Mortgage behemoth Freddie Mac recently reported that the average rate on a 30-year, fixed-rate mortgage ended 2011 @ a very homebuyer friendly 3.95%.

From the entire gang here @ www.FedPrimeRate.com: All the best for 2012.

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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 Federal Open Market Committee (FOMC) will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the January 25^TH, March 13^TH and April 25^TH, 2012 FOMC monetary policy meetings.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will remain at the current 3.25% after the January 25^TH, March 13^TH and April 25^TH FOMC monetary policy meetings are 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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Eighth and Last FOMC Meeting of 2011 Adjourned: U.S. Prime Rate To Stay At 3.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its eighth and last monetary policy meeting of 2011 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 text in bold):

"...Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time..."

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