Futures Market 100% Certain U.S. Prime Rate Will Hold At 3.25% After The December 15 FOMC Monetary Policy Meeting

If you've been wondering when the Fed is going to start a cycle of raising short-term interest rates, the one macroeconomic figure you need to pay attention to is the unemployment rate. That's because the Bernanke Fed is confident that the nation's jobless rate is going to remain stubbornly high well into 2010 and likely beyond, which in turn will serve as a check on inflation. The Fed is still focused on pumping as much stimulus into the economy as it possibly can, to get the economy back to durable growth as soon as possible. It doesn't want to choke off an economic recover by raising short-term rates too soon, but it also doesn't want to keep rates too low for too long, and spark and raging inflation problem down the road. But here's the bottom line: the Fed believes that high unemployment together with continued housing market woes will act as a powerful economic sedative, keeping both consumer and wholesale prices under control.

Many investors are worried that the Fed is going to have an economic growth bias for too long, and that it will tolerate some inflation in exchange for growth. Just look at the price of gold as one piece of evidence: New York Spot was at $816.30 on November 28, 2008, and closed at $1,176.70 a few days ago (on November 27, 2009.)

Many are also worried about the current state of the dollar, but I'm not. The dollar is cyclical. It's been very low before, and has bounced back every time. When the economy returns to sustainable growth and the Fed back off from being the dominant force in the economy, the dollar will strengthen again, as simple as that.

So, does the Fed have it right about weak employment keeping inflation in check? I think so. With so many Americans out of work, or struggling with reduced hours, or forced to work part-time, consumer spending will be weak for some time. Exacerbating the jobs problem: too many homeowners are upside down with their mortgage; if they sell they lose big, and there's no home equity to tap into, the same home equity which supported strong consumer spending before the housing bust.

The above economic woes are acting as a strong disinflationary force in the economy, and will continue doing so for years -- yes, years.

So don't be surprised if the Fed keeps short-term rates -- including the U.S. Prime Rate -- at superlow levels throughout 2010.

Of course, for the latest and most accurate rate forecast, stay tuned to this blog.

Housing Market News: Some Good, Some Bad

OK, first the bad. The Mortgage Bankers Association (MBA) recently reported that mortgage delinquencies have set a new record high. Here's a clip from the MBA press release:

"...The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.64 percent of all loans outstanding as of the end of the third quarter of 2009, up 40 basis points from the second quarter of 2009, and up 265 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The non-seasonally adjusted delinquency rate increased 108 basis points from 8.86 percent in the second quarter of 2009 to 9.94 percent this quarter...The delinquency rate breaks the record set last quarter. The records are based on MBA data dating back to 1972..."

And now the good: sales of both existing (preowned) and newly built homes improved during October 2009, thanks in no small part to Uncle Sammy's $8,000, first-time homebuyer tax credit (there's also a tax credit of up to $6,500 available for longtime homeowners who purchase a replacement home.) That's good news for the housing market in general, but there's more: the credit has been extended. For more, check out this IRS page.

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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 FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the December 15^TH, 2009 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will remain at the current 3.25% after the December 15^TH, 2009 FOMC monetary policy meeting is 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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Futures Market 99% Certain U.S. Prime Rate Will Hold At 3.25% After The August 11 Monetary Policy Meeting

On Friday, the Federal minimum wage will rise from $6.55 per hour to $7.25. The timing of this increase couldn't be worse, in my opinion, as small businesses across the country are already hurting in this deep recession. $0.70 might not seem like much, but for the small business owner who's barely making it -- the one who's already seriously worried about the future; the one who's having a real hard time finding financing; the one who's already been contemplating cutting his or her workforce -- it could mean the difference between keeping 400 employees working full time, or cutting back to 300. Moreover, the labor cost increase will likely prompt many employers to cut back on employee hours. This is no time to throw obstacles in the way of an economic recovery.

Will the increase help the economic recovery? I really don't think so. If you were making minimum wage right now, and all of a sudden you got an extra $39.20 in your pocket each week, would you spend it, knowing that, in this economy, your job could disappear in a flash? Is an extra $156.80 per month going to help that family who got an adjustable rate mortgage (ARM) during the boom -- you know, that mortgage that's about to reset and cause the monthly payment to jump from $1,200 per month to $1,900? Not likely. As a minimum-wage earner who's about to enjoy a slight pay increase, you might take your kids out to McDonald's a little more often, or you might do a little more shopping at the local Wal-Mart. But these two massive corporations are already weathering this recession well, and are likely to continue doing so. They don't need help making money. Small businesses do. America needs to focus on creating new jobs, and keeping small businesses healthy so that business owners keep their employees working.

As of the week that ended on July 4, 2009, there were 6,273,000 continuing claims for unemployment benefits, according to the Department of Labor. A staggering figure.

And then there's the inflation problem. When GDP eventually goes positive, all the money sloshing around in the economy is going to cause the pace of inflation to spike bigtime. A minimum wage increase will only exacerbate the inevitable problems we are going to face with price stability. Inflation will contribute to the dollar getting weaker, and foreign governments may lose faith in our currency.

Congress should postpone this year's minimum wage increase until next summer. The economy should be much improved by then. Moreover, twelve months from now, the billions of dollars of stimulus money that many important players have been waiting for will have had a chance to seep through federal, state and local bureaucracies. Once all that money gets into the hands of business owners, they'll create jobs, lots of jobs, and that should in turn stoke consumer spending.

According to Small Business Administration (SBA) estimates, small businesses account for 60% - 80% of new jobs.

I'm not advocating keeping the minimum wage where it is for the next 5 years. No way. However, I believe strongly that we should raise the minimum wage when we can afford to do so, i.e. when the threat of deflation is long gone and the economy is creating jobs again. The way I see it, increasing the minimum wage now makes it somewhat more likely that we will have to contend with that super ugly mix of stagnant economic growth with high inflation -- also known as stagflation -- which is bad for everybody.

So, just how bad is the current job market? The official national unemployment rate was 9.5% last month, and is widely expected to rise this month. I much prefer to look at the Labor Department's Alternative Measures Of Labor Underutilization table. Scroll down to row 5 and you'll see that the national unemployment rate was actually 10.8% in June, when discouraged and marginally attached workers were factored into the equation. I don't understand why Labor doesn't include these folks in the official rate that everyone, including the mass media, pays attention to, despite the fact that these people are clearly members of the unemployed in America. Here is how Labor defines discouraged and marginally attached workers:

"...Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job..."

I also like to look at the state-by-state numbers. The following are the state-by-state figures for June, sorted by the jobless rate in descending order:

• Michigan: 15.2%
• Rhode Island: 12.4%
• Oregon: 12.2%
• South Carolina: 12.1%
• Nevada: 12%
• California: 11.6%
• Ohio: 11.1%
• North Carolina: 11%
• District Of Columbia: 10.9%
• Kentucky: 10.9%
• Tennessee: 10.8%
• Indiana: 10.7%
• Florida: 10.6%
• Illinois: 10.3%
• Alabama: 10.1%
• Georgia: 10.1%
• Missouri: 9.3%
• Washington: 9.3%
• New Jersey: 9.2%
• West Virginia: 9.2%
• Mississippi: 9%
• Wisconsin: 9%
• Arizona: 8.7%
• New York: 8.7%
• Massachusetts: 8.6%
• Maine: 8.5%
• Alaska: 8.4%
• Delaware: 8.4%
• Idaho: 8.4%
• Minnesota: 8.4%
• Pennsylvania: 8.3%
• Connecticut: 8%
• Colorado: 7.6%
• Texas: 7.5%
• Hawaii: 7.4%
• Maryland: 7.3%
• Arkansas: 7.2%
• Virginia: 7.2%
• Vermont: 7.1%
• Kansas: 7%
• Louisiana: 6.8%
• New Hampshire: 6.8%
• New Mexico: 6.8%
• Montana: 6.4%
• Oklahoma: 6.3%
• Iowa: 6.2%
• Wyoming: 5.9%
• Utah: 5.7%
• South Dakota: 5.1%
• Nebraska: 5%
• North Dakota: 4.2%

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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 99% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the August 11^TH, 2009 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will remain at the current 3.25% after the August 11^TH, 2009 FOMC monetary policy meeting is adjourned: 99% (very likely)
• 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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Fed Boss Ben Bernanke Thinks Congress Should Consider Another Stimulus Package

Stimulus

The rate cut that is very likely to occur on October 29 will be very welcome for businesses and consumers looking for loans and favorable credit card deals, and for those struggling with debt. The odds that the Fed will opt to cut short-term rates by at least 25 basis points (0.25 percentage point) at the end of the month are still 100%, and the odds of a 50 basis point cut for October 29 cut have been increasing as the next Fed meeting approaches.

Rate cuts are great for boosting economic activity, but another stimulus package could do even more for this anemic U.S. economy, especially since many American banks have responded to the current credit crisis by hoarding the capital in their vaults instead of lending it out.

If you've been hoping for another stimulus package from Congress, then you'll like what Fed Boss Ben Bernanke had to say before the Committee on the Budget of the U.S. House of Representatives earlier today. Here's a clip:

"...I understand that the Congress is evaluating the desirability of a second fiscal package. Any fiscal action inevitably involves tradeoffs, not only among current needs and objectives but also--because commitments of resources today can burden future generations and constrain future policy options--between the present and the future. Such tradeoffs inevitably involve value judgments that can properly be made only by our elected officials. Moreover, with the outlook exceptionally uncertain, the optimal timing, scale, and composition of any fiscal package are unclear. All that being said, with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate..."

And here's what House Speaker Nancy Pelosi had to say about Ben Bernanke's remarks:

“...Chairman Bernanke made it clear that a new economic recovery package is critical to boost our weakening economy. In testimony today before the House Budget Committee, Chairman Bernanke added his voice to the chorus of economists, experts and policymakers who insist that America needs a job-creating recovery package to get our economy back on track and to restore consumer and investor confidence..."

“...At a time when Americans are struggling with rising costs and weakened retirement security, and a growing number of workers are losing their jobs, I call on President Bush and Congressional Republicans to once again heed Chairman Bernanke’s advice and as they did in January, work with Democrats in Congress to enact a targeted, timely, and fiscally responsible economic recovery and job creation package...”

Some in Congress want the new stimulus checks to be twice as large as the ones issued earlier this year, but considering the cost, it's tough to predict whether a new package would include bigger checks for American consumers. Stay tuned.

Here are some video clips from Ben Bernanke's comments earlier today:







Another piece of positive news today: the TED spread was 3.62875 percentage points on Friday. Today it declined to 2.82875 points, which is a strong indication that the frozen credit market are starting to thaw.

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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 FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the October 29^TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut by at least 25 basis points at the October 29^TH, 2008 FOMC monetary policy meeting: 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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