Odds At 12% (Not Likely) The U.S. Prime Rate Will Rise At The April 27, 2016 FOMC Monetary Policy Meeting

Prime Rate Forecast

Latest Prime Rate Forecast

As of right now, the investors who trade in fed fund futures via the CME Group have odds at 12% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to raise the target range for the benchmark fed funds rate by at least 25 basis points (0.25 percentage point) at the April 27^TH, 2016 monetary policy meeting (not likely.)

The current United States Prime Rate, which went into effect on December 17, 2015, is 3.5%.

NB: U.S. Prime Rate = (The Fed Funds Target Rate + 3)

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Will the U.S. economy expand with strength in the coming quarters?  For some perspective, let's have a look at capital's flight to safety, via the 10-year Treasury Note yield.

• The average yield was 1.78% last month.  It's 1.94% right now.
• Compare this to the yield when equities were at their 2009 worst: 2.89% (the S + P 500 Index dipped to its 2009 bear-market low  -- 676.53 -- on March 9, 2009.)

The 0.95 point differential speaks volumes (demand for Treasury securities drives yields down.)

Across the Atlantic, the European Central Bank (ECB) is doing all it can to help the eurozone grow.  Last week,  Mario Draghi  announced that the ECB's benchmark interest rate will be lowered to zero, effective today, and that the central bank will pay euro-area banks to lend money to "the real economy," instead of sitting on it:

"...we decided to launch a new series of four targeted longer-term refinancing operations (TLTRO II), starting in June 2016, each with a maturity of four years. These new operations will reinforce the ECB’s accommodative monetary policy stance and will strengthen the transmission of monetary policy by further incentivising bank lending to the real economy. Counterparties will be entitled to borrow up to 30% of the stock of eligible loans as at 31 January 2016. The interest rate under TLTRO II will be fixed over the life of each operation, at the rate on the Eurosystem’s main refinancing operations prevailing at the time of take-up. For banks whose net lending exceeds a benchmark, the rate applied to the TLTRO II will be lower, and can be as low as the interest rate on the deposit facility prevailing at the time of take-up. There will be no requirement for mandatory early repayments under TLTRO II, and switches from TLTRO I will be allowed..."

Is the pain of the 2008 banking crisis and the resultant Great Recession still with us?  You betcha'.  Stay tuned...

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Current Odds

The latest odds reflect recent economic data, and today's release of the FOMC's economic projections:

• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the April 27^TH, 2016 FOMC monetary policy meeting: 12% (not likely.)
  
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• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the June 15^TH, 2016 FOMC monetary policy meeting: 41% (not likely.)
  
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• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the July 27^TH, 2016 FOMC monetary policy meeting: 46% (on the fence.)
  
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• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the September 21^ST, 2016 FOMC monetary policy meeting: 55% (on the fence.)
  
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• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the November  2^ND, 2016 FOMC monetary policy meeting: 58% (on the fence.)
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• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the December  14^ND, 2016 FOMC monetary policy meeting: 70% (somewhat likely.)
  
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• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the February 1^ST, 2017 FOMC monetary policy meeting: 73% (somewhat likely.)
  
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• NB: US Prime Rate = (The Fed Funds Target Rate + 3)

The odds associated with fed fund futures contracts -- widely accepted as the best predictor of what the FOMC will do with the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Second FOMC Meeting of 2016 Adjourned: U.S. Prime Rate Remains At 3.5%

U.S. Prime Rate

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its second monetary policy meeting of 2016 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 0.25% - 0.5%, and the United States Prime Rate (a.k.a the Fed, national, or WSJ Prime Rate) will continue at the current 3.5%.

Here's a clip from today's FOMC press release (note text in bold):

"...Information received since the Federal Open Market Committee met in January suggests that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months. Household spending has been increasing at a moderate rate, and the housing sector has improved further; however, business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation picked up in recent months; however, it continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

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 of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent..."

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 FOMC Economic Projections

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Odds At 0% (Very Unlikely) The U.S. Prime Rate Will Rise At The March 16, 2016 FOMC Monetary Policy Meeting

Prime Rate Forecast

Latest Prime Rate Forecast

As of right now, the investors who trade in fed fund futures via the CME Group have odds at 0% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to raise the target range for the benchmark fed funds rate by at least 25 basis points (0.25 percentage point) at the March 16^TH, 2016 monetary policy meeting (very unlikely.)

The current United States Prime Rate, which went into effect on December 17, 2015, is 3.5%.

NB: U.S. Prime Rate = (The Fed Funds Target Rate + 3)

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The latest odds reflect recent readings on jobs, wages, inflation, crude oil, manufacturing, yields,  housing, equities (S+P 500, DJIA, NASDAQ) and productivity.

The average 10-year U.S. Treasury yield was 1.78% last month, a flight-to-safety trend not seen since April of 2013.

Stay tuned!

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Current Odds

• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the March 16^TH, 2016 FOMC monetary policy meeting: 0% (very unlikely.)
  
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• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the April 27^TH, 2016 FOMC monetary policy meeting: 6% (very unlikely.)
  
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• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the June 15^TH, 2016 FOMC monetary policy meeting: 27% (not likely.)
  
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• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the July 27^TH, 2016 FOMC monetary policy meeting: 31% (not likely.)
  
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• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the September 21^ST, 2016 FOMC monetary policy meeting: 43% (not likely.)
  
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• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the November  2^ND, 2016 FOMC monetary policy meeting: 47% (on the fence.)
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• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the December  14^ND, 2016 FOMC monetary policy meeting: 62% (somewhat likely.)
  
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• Current odds that the Prime Rate (currently 3.5%) will rise by at least 25 basis points at the February 1^ST, 2017 FOMC monetary policy meeting: 63% (somewhat likely.)
  
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• NB: US Prime Rate = (The Fed Funds Target Rate + 3)

The odds related to fed fund futures contracts -- widely accepted as the best predictor of what the FOMC will do with the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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