Sixth FOMC Meeting of 2017 Adjourned: U.S. Prime Rate Remains At 4.25%

U.S. Prime Rate

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its sixth 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 July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have remained solid in recent months, and the unemployment rate has stayed low. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year 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. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, 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. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, 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.

In October, the Committee will initiate the balance sheet normalization program 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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ECONOMIC PROJECTIONS

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Odds At 98.6% (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 98.6%  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% at 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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At 3.0%, the Commerce Department's second estimate of second quarter GDP was a very welcome figure which bested predictions.  And the icing on the cake: Corporate profits rose by $26.8 billion, after decreasing by $46.2 billion during the first quarter, according to the government's preliminary estimate.

But the U.S. economy continues to send mixed signals, which is why traders are virtually certain the Fed will do nothing with the benchmark fed funds target rate tomorrow.  Here's some more recent hard and soft economic data:

• An estimated 156,000 nonfarm jobs were created during August 2017; economists were expecting around 180,000.  Contributing to the weakness: month-on-month average hourly earnings rose by a very tepid 0.1138%, while the year-on-year advance remained stuck at 2.5%, matching April, May, June and July.
• Inflation continues below the Federal Reserve's 2% target.  During July, and year-on-year, both the PCE Price Index and the Core PCE Price Index were 1.4%.
• Retail sales declined by 0.2% during August.
• Second quarter nonfarm productivity was revised higher, from +0.9% to +1.5%.
• Soft data: The NFIB®'s Small Business Optimism Index edged higher, from 105.2 in July to 105.3 during August.
  
  
  • University of Michigan's Index of Consumer Sentiment rose from 93.4 during July, to 96.8 for August.
  • The Conference Board®'s Consumer Confidence Index® rose from 120.0 during July, to 122.9 for August.
• We can thank Hurricane Harvey for the -0.9% reading associated with August industrial production, with the capacity utilization rate dropping to 76.1%.
• Equities continue to surge to new records.  Here's a bull-market update, as of the September 18, 2017 close:
  
  
  • The S + P 500 Index closed at 2,503.87, a new all-time record high.  This is a 270.105% increase since the March 9, 2009 bear-market low (676.53.)
  • The Dow Jones Industrial Average (DJIA) closed at 22,331.35, a brand new all-time record high.  This is a 243.188% increase since the March 9, 2009 bear-market low (6,507.04.)
  •  The NASDAQ Composite closed at 6,454.64. This is a 408.784% increase since the March 9, 2009 bear-market low (1,268.64.)

Stay tuned for tomorrow's decision on short-term rates...

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Current Odds

• Current odds the U.S. Prime Rate will continue at 4.25% after the September 20^TH, 2017 FOMC monetary policy meeting: 98.6%  (very likely), with remaining odds --  1.4% (very unlikely) -- that the U.S. Prime Rate will be 25 basis points (0.25 percentage point) lower.
  
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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: 96.7%  (very likely), with  2.0% odds on a rate increase (very unlikely) and 1.3% odds on a rate cut (very unlikely.)
  
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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: 42.5%  (somewhat unlikely), with  0.6% odds on a rate cut (extremely unlikely) and 56.9% odds (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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