2014 Prime Rate Forecast: Prime Very Likely To Contiue At 3.25% All Year

Here's a clip from today's Federal Open Market Committee (FOMC) monetary policy release:

"...Beginning in January [2014], the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month..."

So the Fed has decided to lift its foot off the money-printing pedal next month, just a little bit, and will buy $75 billion of debt per month, instead of $85 billion.

Wall Street reacted positively to the Fed's decision to begin tapering its bond-buying program, with both the Dow Jones Industrial Average (DJIA) and the S and P 500 Index closing with new record highs today.

Scaling back on bond buying, after all, means that the Fed is confident that the economy will continue to improve.

Wall Street was also cheered by the Fed's solid language regarding short-term rates; another clip:

"...The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal..."

In other words, the Fed is going to keep short-term rates (which includes the US Prime Rate)  in the deep freeze until the economy is very firmly in escape-velocity mode, and is willing to risk some inflation down the road to get there.

The United States Prime Rate is essentially a function of the fed funds target rate:

US Prime Rate = (The Federal Funds Target Rate + 3)

And , at 3-1/4%, the Prime is currently as low as it can go.

Month after month after month of strong, non-farm payrolls, with 2% inflation on the side.  That's what the Fed is looking for.

Earlier today, the FOMC also released projections for the benchmark fed funds target rate.  Out of 17 participants, only 2 are forecasting a increase for the fed funds target rate at some point during 2014, with 15 predicting that the FOMC will leave it where it is right now (range of 0%-0.25%.)

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Dr. Janet L. Yellen

Dr. Janet L. Yellen is set to take over as Fed Boss early next year.

Her challenges are many, and the scrutiny will be intense.  Continuing to steer and eventually complete the economic recovery which Ben Bernanke started will be no picnic, with the headwind of a dysfunctional Congress and a virtually empty toolbox.

But if anyone has the brains and background to get the job done, it's Dr. Yellen.

Ben Bernanke is a clever economist too.

But, despite being an expert on the Great Depression, Dr. Bernanke hasn't been able to get the US economy back to full strength, and he's had four years to try. 

Moreover, Fed Boss Bernanke was late in his reaction to the banking crisis and subsequent housing crash, a tardiness that may have contributed to the protracted nature of the worse recession since the big one back in 1929.

Let's see if Dr. Yellen can figure out how to get banks to stop sitting on their massive piles of cash, and lend to deserving businesses and entrepreneurs.

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Mortgage Rate Forecast

If the economic recovery continues at a strong and sustained pace, investors will continue to rotate out of the safety of government debt, and move to riskier assets like stocks.

If that happens, US Treasury yields will rise, which will cause mortgage rates to rise (rates associated with  30-year, fixed-rate mortgages track very closely with the yield on the Ten-Year U.S. Treasury Note.)

If the recovery peters out, then investors will scramble back to government bonds, and mortgage rates will fall.

Anyone who thinks that they can offer a more accurate prediction of American mortgage rates, will probably try to sell you a popular and vintage bridge in Brooklyn next....

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From the rate watchers here @ www.FedPrimeRate.com: All the best for 2014.

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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 Federal Open Market Committee (FOMC) will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the January 29^TH, March 19^TH and April 30^TH, 2014 FOMC monetary policy meetings.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will remain at the current 3.25% after the January 29^TH, March 19^TH and April 30^TH, 2014 FOMC monetary policy meetings are 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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2013 Prime Rate Forecast: Prime Extremely Likely To Remain At 3.25% All Year

Here's a clip from the last (October 24, 2012) FOMC monetary policy statement:

"...In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015..."

Today's statement was interesting because the Fed switched to explicit  employment and inflation targeting.  Clips from today's statement:

"... In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored..."

Therefore, it's an extremely good bet that the Fed won't lift short-term rates, including the US Prime Rate, during 2013, and will probably leave its cardinal interest rate exactly where it is during 2014 as well.

The Fed is currently projecting that the jobless rate will be in the range of 6.9% to 7.8% during 2013.  The projected central tendency for 2013, which leaves out the top and bottom three projections, is currently 7.4% to 7.7%.  Federal Reserve Board members and Fed Bank presidents are the contributors to these  projections.

The US Prime Rate is essentially a function of the fed funds target rate:

U.S. Prime Rate = (The Federal Funds Target Rate + 3)

At 3.25%, US Prime is currently as low as it can go.

Employment / inflation targeting is new territory for the Fed, and it explains why the central bank is willing to dump huge sums of newly printed cash into the system, risking serious inflation down the road.  The money supply continues to expand, and will only keep growing as the Fed continues to blow up its balance sheet.

The nation needs jobs in big way.  The Fed is, therefore, risking fresh, inflation-menacing cash exactly where it should be risking it: housing.  Mortgages are, after all, precisely where the Great Recession started in the first place.

Mortgage Rate Forecast

Here's another key clip from today's statement:

"...To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month..." 

Both actions described above will place continued and substantial downward pressure on mortgage rates.  The average rate on a 30-year, fixed-rate mortgage during November 2012 was 3.35%.  With the Fed doing all it can to help the housing market, don't be surprised if mortgage rates fall below Prime (3.25%) in the short term.

The Fed controls the Prime Rate much more directly than it does mortgage rates. Rates on 30-year, fixed-rate mortgages track very closely with the yield on the 10 Year U.S. Treasury Note.

In the long term, as the economy improves, capital will flow from the safety of long-term, government debt into riskier assets like equities.  As this happens, long term bond yields will rise, which in turn will cause mortgage rates to rise. 

From the entire crew here @ www.FedPrimeRate.com: All the best for 2013.

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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 Federal Open Market Committee (FOMC) will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the January 30^TH, March 20^TH and May 1^ST, 2013 FOMC monetary policy meetings.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will remain at the current 3.25% after the January 30^TH, March 20^TH and May 1^ST, 2013 FOMC monetary policy meetings are 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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2012 Prime Rate Forecast: Prime Very Likely To Remain At 3.25% All Year

Since August 9, 2011, the Federal Open Market Committee (FOMC) has included the following language in each post-monetary-policy-meeting press release:

"...The Committee currently anticipates that economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013..."

This means that the U.S. Prime Rate, which is the fed funds target rate plus 3 points, is very unlikely to rise during all of 2012. And, of course, Prime can't go any lower since, at 3.25%, it's already at rock bottom.

America's central bank is unique in that it has a dual mandate: keep prices stable and keep the unemployment rate as low as possible (maximum employment.) If the Fed were like many other central banks that only have to worry about keeping prices stable, then there is no way it could send such a powerful, long term signal to markets (near-zero rates for 2 years.) However, Congress decided to complicate the Fed's mission by making it a pseudo-political organization, and that's the way it is. When 200,000+ jobs are being created month after month, then the Fed will start thinking about raising short-term interest rates. Until then, it's cheap money for American banks, businesses, credit-card borrowers, etc.

So, you savers out there who are tired of extremely weak returns on your saving accounts and CD's: don't blame Ben Bernanke. He's just doing what he's supposed to do, according to the Fed's mandate.

Mortgage Rates

The Fed doesn't control mortgage rates like it does the Prime Rate. Rates on 30-year, fixed-rate mortgages track very closely with the yield on the 10 Year US Treasury Note.

But since:

• economic growth is probably going to remain tepid for many more months, and
• inflation expectations are tame, and
• Wall Street money continues to be very keen on finding shelter under the copper roof that is US government debt

mortgage rates are likely to remain extremely favorable for solid borrowers during 2012.

The Ten-Year Treasury yield was 3.31% at the end of 2010. It ended 2011 @ 1.87%.

Mortgage behemoth Freddie Mac recently reported that the average rate on a 30-year, fixed-rate mortgage ended 2011 @ a very homebuyer friendly 3.95%.

From the entire gang here @ www.FedPrimeRate.com: All the best for 2012.

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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 Federal Open Market Committee (FOMC) will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the January 25^TH, March 13^TH and April 25^TH, 2012 FOMC monetary policy meetings.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will remain at the current 3.25% after the January 25^TH, March 13^TH and April 25^TH FOMC monetary policy meetings are 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.

--> www.FedPrimeRate.com Privacy Policy <-- >  SITEMAP  <