Fifth FOMC Meeting of 2017 Adjourned: U.S. Prime Rate Holds At 4.25%

U.S. Prime Rate

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its fifth monetary policy meeting of 2017 and, in accordance with our most recent forecast, has voted to leave the benchmark target range for the federal funds rate at 1.00% - 1.25%. Therefore, the United States Prime Rate (a.k.a the Fed Prime Rate) will continue at the current 4.25%.

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

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

"...Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained 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. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant 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.

For the time being, 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. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell..."

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Odds At 96.9% (Very Likely) The U.S. Prime Rate Will Continue At 4.25% After Tomorrow's FOMC Monetary Policy Meeting

Prime Rate Forecast

Prime Rate Forecast

As of right now, odds are at 96.9%  that the Federal Open Market Committee (FOMC) will vote to leave the target range for the benchmark fed funds rate at 1.00% - 1.25% after tomorrow's monetary policy meeting (very likely.)

The current Prime Rate, which went into effect on June 15, 2017, is 4.25%.

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

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• The median price for a used home cruised to a new, all-time record high in June: $263,800.  Thumbs up.
  
• Both June Housing Starts and Building Permits advanced on both the month and the year. Happiness and cheer. 

OK, so here's the weakness, that virtually guarantees the Fed will leave short-term rates alone tomorrow:

• U.S. Gross Domestic Product, the final estimate for the first quarter of 2017, came in at 1.4%.
  
• Average Hourly Earnings rose by 0.1526% in June, while the year-on-year increase was 2.5%.
  
  
• Disinflation: from April to May, the year-on-year PCE Price Index slipped from 1.7% to 1.4%, while the year-on-year Core PCE Price Index slid from 1.5% to 1.4%.
  
• Disinflation: From May to June, the year-on-year Consumer Price Index moved from 1.9% to 1.6%.
   
• Between February and June of this year, gains in year-on-year Retail Sales have declined in the following order:  5.7% to 5.2% to 4.5% to 3.8% to 2.8%.

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Current Odds

• Current odds the U.S. Prime Rate will continue at 4.25% after tomorrow's FOMC monetary policy meeting: 96.9%  (very likely), with 3.1% odds (very unlikely) the U.S. Prime Rate will rise to 4.5%.
  
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• Current odds the U.S. Prime Rate will continue at 4.25% after the September 20^TH, 2017 FOMC monetary policy meeting: 91.6%  (likely), with remaining odds --  8.4% (unlikely) -- that the U.S. Prime Rate will be at least 25 basis points (0.25 percentage point) higher.
  
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• Current odds the U.S. Prime Rate will continue at 4.25% after the November 1^ST, 2017 FOMC monetary policy meeting: 89.8%  (likely), with remaining odds --  10.2% (unlikely) -- that the U.S. Prime Rate will be at least 25 basis points (0.25 percentage point) higher.
  
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• Current odds the U.S. Prime Rate will continue at 4.25% after the December 13^TH, 2017 FOMC monetary policy meeting: 48%  (on the fence), with remaining odds --  52% (on the fence) -- that the U.S. Prime Rate will be at least 25 basis points (0.25 percentage point) higher.
  
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• NB: United States 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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