Prime Rate

also known as the Fed, National or United States Prime Rate,
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Wednesday, March 16, 2016

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

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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 27TH, 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 27TH, 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 15TH, 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 27TH, 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 21ST, 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  2ND, 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  14ND, 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 1ST, 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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