2013 Prime Rate Forecast: Prime Extremely Likely To Remain At 3.25% All Year

Here's a clip from the last (October 24, 2012) FOMC monetary policy statement:

"...In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015..."

Today's statement was interesting because the Fed switched to explicit  employment and inflation targeting.  Clips from today's statement:

"... In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored..."

Therefore, it's an extremely good bet that the Fed won't lift short-term rates, including the US Prime Rate, during 2013, and will probably leave its cardinal interest rate exactly where it is during 2014 as well.

The Fed is currently projecting that the jobless rate will be in the range of 6.9% to 7.8% during 2013.  The projected central tendency for 2013, which leaves out the top and bottom three projections, is currently 7.4% to 7.7%.  Federal Reserve Board members and Fed Bank presidents are the contributors to these  projections.

The US Prime Rate is essentially a function of the fed funds target rate:

U.S. Prime Rate = (The Federal Funds Target Rate + 3)

At 3.25%, US Prime is currently as low as it can go.

Employment / inflation targeting is new territory for the Fed, and it explains why the central bank is willing to dump huge sums of newly printed cash into the system, risking serious inflation down the road.  The money supply continues to expand, and will only keep growing as the Fed continues to blow up its balance sheet.

The nation needs jobs in big way.  The Fed is, therefore, risking fresh, inflation-menacing cash exactly where it should be risking it: housing.  Mortgages are, after all, precisely where the Great Recession started in the first place.

Mortgage Rate Forecast

Here's another key clip from today's statement:

"...To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month..." 

Both actions described above will place continued and substantial downward pressure on mortgage rates.  The average rate on a 30-year, fixed-rate mortgage during November 2012 was 3.35%.  With the Fed doing all it can to help the housing market, don't be surprised if mortgage rates fall below Prime (3.25%) in the short term.

The Fed controls the Prime Rate much more directly than it does mortgage rates. Rates on 30-year, fixed-rate mortgages track very closely with the yield on the 10 Year U.S. Treasury Note.

In the long term, as the economy improves, capital will flow from the safety of long-term, government debt into riskier assets like equities.  As this happens, long term bond yields will rise, which in turn will cause mortgage rates to rise. 

From the entire crew here @ www.FedPrimeRate.com: All the best for 2013.

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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 30^TH, March 20^TH and May 1^ST, 2013 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 30^TH, March 20^TH and May 1^ST, 2013 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 Final FOMC Meeting of 2012 Adjourned: U.S. Prime Rate To Remain At 3.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its eighth and final monetary policy meeting of 2012 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 (a.k.a the national, WSJ or Fed Prime Rate) will remain 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 October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate..."

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