Futures Market Still 100% Certain U.S. Prime Rate Will Remain At 3.25% After The August 10 FOMC Monetary Policy Meeting

Slow Economy Ahead

Double-dip recession? More likely than unlikely, in my opinion. Scarcity of credit, stubbornly high unemployment, falling prices, commercial mortgage defaults, massive national debt...and the list goes on. US states are in serious trouble, and no state can simply print more money out of thin air the way the Fed can.

And while we're on the topic of printing money (a.k.a. quantitative easing), it looks like the Fed may have to return to doing just that in order to avoid years of stagnant growth and falling prices, a la Japan.

Japan, despite super-low interest rates and quantitative easing, has been dealing with anemic economic expansion and deflation, sprinkled with the odd recession here and there, for the past 20 years. Japan's stock market has yet to return to its 1989 peak, and it has a loooong way to go. The Nikkei 225 closed @ 38,915.87 on December 29, 1989. The Nikkei is currently @ 9,489.34.

Japanese central bankers made the mistake of using freshly minted cash to prop up zombie companies and banks. They should have done a better job of spreading the cash around.

It's very clear that keeping the fed funds target rate near zero isn't going to be enough to reflate the American economy. The Fed is going to have to get more aggressive, and creative.

St. Louis Fed boss James Bullard recently produced a paper on this. Here's a quote from the abstract:

"...The FOMC's extended period language may be increasing the probability of a Japanese-style outcome for the U.S., and (2) on balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome..."

I say: start the presses! But forget about dumping cash in places where it won't move. Buying long term US Treasury securities isn't going to get the economy going. Neither is buying toxic mortgages. Sure, it'll keep mortgage rates low, but the housing market is so messed up that we simply can't depend on it to make Americans feel prosperous and wealthy enough to start spending again.

Like the Nikkei, housing has a looooong way to go.

As for the banks: they continue to fail left and right, while the ones that are making it are in total survival mode, i.e. they're being extremely stingy with lending.

I say give every tax-paying American family $5,000 and strongly urge them to spend it on American goods and services. Crazy? I don't think so. And, it could even end up being a cheaper solution than all the stimulus that's been tried so far. The Treasury department could spread the $5,000 over 5 months, or $1,000 per month. Treasury would limit the money to families, but even if every taxpaying American got a check, the cost of the program would be $690 billion (as of 2007 there were 138 million taxpayers in the U.S.) Cheaper than the original cost of the TARP; way cheaper than that arbitrary war in Iraq.

And here's how to create jobs: give every business a nice chuck of change for every new hire. On top of that, offer cash for converting temporary workers to full-time employees. That'll get the unemployment rate down, fast.

Oh, and abolish all Small Business Administration (SBA) loan programs. For most businesses that need cash, these programs simply don't work. Start from scratch with a new agency that guarantees business loans, but also has a simple application process. Is "government" and "simple" akin to oil and water? Perhaps. But it doesn't have to be, especially with the menace of the double-dip looming over the American economic landscape.

Start the presses!

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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 August 10^TH 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 10^TH, 2010 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 90% Certain U.S. Prime Rate Will Remain At 3.25% After The June 23 FOMC Monetary Policy Meeting

Which unemployment rate should we pay attention to? U-3 or U-6? U-3 is the headline or official unemployment rate, the one you hear when listening to business news. The Labor Department defines U-3 as:

"Total unemployed, as a percent of the civilian labor force"

Whereas U-6 is defined as:

"Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force"

U-3 is the headline, because it paints a rosier picture than the reality of the employment situation in the U.S. But why would you not take into account Americans who are unemployed, who need an income and who have given up looking for work? Makes no sense.

Here's how I see it. If you need an income, you're unemployed. If you have a job and don't have health insurance, you're unemployed. If you're working yet can't meet your most urgent financial obligations, like paying child support and your mortgage, then you're unemployed. That's why U-6 is the only gauge that matters.

Today the nation learned that the official unemployment rate (U-3) in the U.S. jumped from the January through March rate of 9.7% to 9.9% for April. The Labor Department put a positive spin on this by noting that the higher jobless figure was due to previously discouraged American workers getting off the couch and starting to look for work again. U-6 stood at 17.1% for April.

During April, American companies added 290,000 new jobs to their non-farm payrolls, while the new jobs figure for February and March were revised up to a total of 120,000.


It's been a while since we've seen the future market less than 100% certain that the Fed will keep short-term rates (including the U.S. Prime Rate) where they are, but it's still a safe bet that the Fed will remain on the sidelines for at least one more FOMC monetary policy meeting.

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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 90% (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 June 23^RD, 2010 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 June 23^RD, 2010 FOMC monetary policy meeting is adjourned: 90% (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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Futures Market 100% Certain U.S. Prime Rate Will Hold At 3.25% After The April 28 FOMC Monetary Policy Meeting

For certain, Americans are starting feel prosperous again.

Yesterday, the Commerce Department reported that consumer spending increased by 0.3% last month, the fifth-straight month in positive territory. Today, the Conference Board reported that its Consumer Confidence Index (CCI) rose from 46.0 for February to 52.5 for this month.

The Fed is going to cease buying mortgage-backed securities (MBS) tomorrow (Wednesday.) That, in turn, will likely cause mortgage rates to rise steadily over time. Not good news for the beleaguered housing market.

With the DJIA almost back to the 11,000 mark again, it's no wonder that Americans are feeling optimistic about their financial circumstances. So I guess it's time for a reality check, in the form of a bear-market update.

Since closing with record highs on October 9, 2007, the DJIA has now lost 3,257.11 points (22.995%), while the broader S + P 500 Index has shed 391.88 points (25.038%). The record high for the DJIA is 14,164.53; for the S + P 500 Index it's 1,565.15. Earlier today, the DJIA closed at 10,907.42, which is just about where is settled on June 7, 1999 (10,909.38).

Earnings season is just around the corner, and expectations are high. According to Thomson Reuters, companies in the S + P 500 Index are projected to report earnings growth of 36%, with revenue growth expanding by 10%. If the prognosticators got it right, we may see the DJIA reaching for 12,000 by Xmas 2010.

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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 April 28^TH, 2010 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 April 28^TH, 2010 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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