When Will the US Prime Rate Go Up?

When Will The Prime Rate Rise?

Too many Americans are worried about their finances. The latest numbers out of the Labor Department say it all: As of August 2010, the jobless rate in the United States is 9.6%, and there are now close to 15 million unemployed people across the country. Those fortunate enough to have steady employment aren’t resting easy either. The National Bureau of Economic Research recently announced that the Great Recession, which began in December 2007, ended in June of 2009. However, since last summer, economic growth has been lackluster at best. Sluggish growth means that all types of companies may continue to cut costs by, among other possible actions, reducing their payrolls.

What do high employment and slow economic growth have to do with the US Prime Rate? Actually, everything. It’s because so many Americans are jobless, and because the economy is anemic with virtually no inflation, that the Prime Rate in the United States won’t rise any time soon; certainly not before the end of 2010.

The Prime Rate is used as an index for many financial products, like consumer credit cards, business credit cards, personal loans, home equity lines of credit and business loans.

The Federal Reserve (The Fed), which serves as America’s central bank, controls the Prime Rate, via the benchmark fed funds target rate. The formula is easy: US Prime Rate = (the fed funds target rate + 3). The target fed funds rate is the most important short-term interest rate in the United States. It determines the cost of overnight loans between American banks.

In response to the global banking crisis and Great Recession of recent years, the Fed lowered the target fed funds rate to a range of 0% - 0.25%. It was an unprecedented move by the Fed, one that caused the Prime Rate to drop to 3.25%, in accordance with the formula delineated above. Now, since the Fed has lowered its benchmark rate to its lowest possible level, that means the current US Prime Rate – 3.25% -- is also as low as it can go.

So when will the Prime Rate rise? Answer: when the Fed is satisfied that the US economy is not just growing, but growing sustainably, and at pace that will prompt companies to add new and previously laid off workers to their payrolls. Before the Fed will even consider raising the fed funds target rate, there will have to be a whole lot fewer than 15 million unemployed people in the United States, and threat of deflation will have to have been eliminated.  The Fed will likely be looking for an unemployment rate of around 5.5% or lower, with GDP growth of around 3%, for at least two, back-to-back quarters.

The Fed wants inflation to rise at a moderate pace, and to get as many jobless Americans back to work. That is, after all, the Fed’s dual mandate, it’s raison d’etre: price stability, and maximum, sustainable employment.

So if you want to know when the Fed will move short-term rates -- including the Prime Rate -- higher, then pay attention to the latest business news. If you hear or read that:

• nonfarm payrolls have been rising at a strong pace month-after-month, and
• the economy is growing and likely to continue expanding at a respectable pace, and
• the cost of goods and services, from food and energy to cell phones and hair cuts, are increasing at a moderate to strong pace (keep an eye on the PCE Price Index and the Consumer Price Index.)  The Federal Reserve has an inflation target of 2.0%.

then, at that point, the Fed is likely to start sending clear signals that a rate hike is in the offing.

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Futures Market 98% Certain U.S. Prime Rate Will Hold At 3.25% After The November 4 FOMC Monetary Policy Meeting

The Reserve Bank of Australia (RBA), Australia's central bank, has just raised the target for its cash rate by 25 basis points (0.25 percentage point), from 3.00% to 3.25%. Today's news is significant because Australia is the first G20 nation to raise its cardinal short-term interest rate since central banks around the world cut rates aggressively to counter the effects of the global credit crisis. Australia, which is the 14^TH largest economy in the world, last made a move on rates back in April of this year, when the RBA cut the target for it's key rate by 25 basis points.

Australia has weathered the global recession and financial crisis relatively well. The Australian economy grew by 0.6% during Q2 2009, while the United States declined by 0.7% during the same period.

Most economists are forecasting that the Fed will leave rates at record-low levels into 2010. When the Fed does decide to boost short-term rates, the Federal Open Market Committee (FOMC) is very likely to do so aggressively, as there's already an extraordinary amount of cash in the system that will need to be reined in. The Fed is very much aware of the risk of sparking another Great Inflation like the one the U.S. experienced during the 1970's. In the early 80's, Former Fed boss Paul Volcker was forced to raise rates to very high levels to bring inflation under control. The most significant byproduct of those high rates was a recession.

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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 98% (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 November 4^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 November 4^TH, 2009 FOMC monetary policy meeting is adjourned: 98% (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 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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Futures Market 98% Certain U.S. Prime Rate Will Hold At 3.25% After The August 11 Monetary Policy Meeting

It's been a volatile week in equities markets, so we're going to mix this Prime Rate forecast with a bear market update.

Since closing with record highs on October 9, 2007, the DJIA has now lost 6,018.01 points (42.486%), while the S&P 500 Index has shed 686.02 points (43.831%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15.

Year-to-date, the DJIA is down 629.87 points (7.177%), while the S&P 500 is down 24.12 points (2.67%).

OK, so now for some positive bear-market news: since the bear-market low of March 6, 2009, the DJIA is up by 1,519.58 points (22.93%), while the S&P 500 is up by 195.75 points (28.644%).

• There's also good news from an energy perspective: crude oil for future delivery closed at $59.89 per barrel in New York today. On July 11, 2008, crude closed at $145.08 per barrel. That's a year-over-year decline of $85.19 (58.719%). No one wants high energy prices to slow down an already drawn-out economic recovery, so most of the economic world is hoping that crude oil prices remain tame. However, lower oil prices also mean that global demand for energy is relatively weak, which could mean that a return to prosperity may be further down the road than many economists are currently predicting.
  
• There was also some halfway decent news from the Labor Department yesterday. Though the unemployment rate for June 2009 was reported at 9.5% in a previously released Labor Department report -- and will likely rise this month -- new claims for unemployment benefits dipped below the 600K mark for the first time in countless weeks. For the week that ended on July 4, 2009, 565,000 Americans applied for jobless benefits. This news, however, was tempered by fact that continuing claims for jobless benefits surged by 159,000 to 6,883,000.

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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 98% (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: 98% (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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Tips for Surviving A Recession

Americans are worried about their finances, and they're angry with their government. The federal government is borrowing tens of billions of dollars to keep zombie banks and corporations alive, while at the same time offering limited help for individual Americans who have always been responsible with their finances. Regardless of what the government is doing, middle-class families, small business owners and everyone else who's feeling the pinch of this recession should do what they can to survive. Here are some recession survival tips:

• Become An Indispensable Employee - Layoffs are happening everywhere; no sector of the economy is safe. A sound workplace strategy: become the employee that your company can't do without. You don't have to suck up to your boss, but there are things you can do to make yourself stand out in the crowd. Be the employee who shows up to work early and leaves late. Make a point of showing off to your boss just how productive you are. Every once in a while, make intelligent recommendations on how the company you work for can save money. When you see a conflict flare up, be the level-headed mediator who resolves the problem.
  
  
• Get Rid of Your Debt - Don't get into the mindset that having credit card debt is OK. It's not OK. Even if you have only a few hundred dollars of credit card debt, and you're paying interest on that debt, then your finances need fixing. Cut back on extraneous expenses and pay your credit card debt down to zero as soon as you can.
  
  If you have old credit card accounts that you don't use, keep these cards open. This will help to keep your FICO® credit score healthy. If you recently used an old credit card to make a small purchase so that your bank doesn't close the account, that's fine. But pay that balance down to zero right away. You will reap no benefit from paying down a credit card balance over time, large or small.
  
  
• Stay Fit! - We all know that there are unnumbered benefits associated with physical and mental fitness. One of the most overlooked is the amount of money it can save. You can't prevent the medical bills associated with e.g. a car accident but, by staying in shape, eating right and not smoking, you can prevent maladies like cancer, type II diabetes, heart disease and hypertension. Medical bills can pile up extremely fast, and, if you're unfortunate enough to end up dealing with a protracted illness, you could end up losing your job as well.
  
  Keep your brain healthy by eating foods that contain omega-3 fatty acids as often as possible. Sardines, salmon and fish oil pills are all good picks. If you want to have a great mind into your old age, exercise and cultivate your brain by learning new skills like a new language or new dance steps. When you're bored waiting in line somewhere, count backwards in your head. Start with the number 300, then subtract seven or nine (not an easy decrement like two or five), and keep going. A healthy, productive brain is the best tool you can have to build wealth in any economic climate.
  
  
• Boost Your Rainy-Day Fund - Your goal should be to have enough cash in the bank to survive for a year if you lost your main source of income.
  
  
• Invest In Gold and Peer-to-Peer (P2P) Lending - Right now, both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index are off more than 45% from their October 9, 2007 peak. Bottom line: stocks aren't looking good right now. Moreover, since stocks have become unattractive to both institutional and individual investors, lots of Wall Street money has been moving to the safety of government securities, driving yields way down. Investing in gold makes perfect sense right now. The Fed and the Treasury department have been pumping vast quantities of cheap cash into the economy, which will cause inflation to flare up like an ulcer down the road. Investors will move their money to gold even faster than they are now, driving its price upward.
  
  P2P lending is also a great investment option right now, if you can tolerate some risk. For example, at Lending Club, the average return is 9.05%. Where else can you help yourself with a high rate of return, while helping worthy borrowers who can't find loans elsewhere?
  
  
• Sell Stuff on eBay and Craigslist - You know you have lots of stuff around the house that you could sell on eBay.com, so just sell it. Better yet, list your stuff on Craigslist.com for free. Whenever you pick up an item in your home and say to yourself, "Nah, that couldn't sell on eBay or Craigslist," snap a few photos of the item and list it. Just about anything can be sold online; this is especially true today as this recession has turned many consumers into serious bargain hunters.
  
  
• Refinance Your Mortgage - Right now, the Federal Reserve and the Treasury Department are working together to keep mortgage rates as low as possible. The average refinance rate is expected to fall and remain below 5% for some time, which makes it a great time to get out of a high-rate mortgage. To get the best rate, make an effort to get your FICO credit score above 760 (720 is no longer considered top-tier.)

If you don't like what the government is doing with your tax dollars and money it's borrowing from other countries then contact your representatives in the House and Senate. But don't waste too much time and energy complaining. Every morning, remind yourself to focus your efforts on increasing your income and net worth. This recession has the potential of lasting two years or more, so even wealthy families are cutting back and preparing themselves for the worst. The key to surviving this economic downturn is to build and preserve wealth, but never overlook the importance of preserving your mental and physical health.

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Investment Options for the Recession-Weary

The media have been relentless in their discussion of the current state of the economy. Many Americans have been paying very close attention to economic news headlines, and they've been fretting about their declining investment portfolios. This painful recession has prompted many to take step that are tantamount to putting their hard-earned money in a coffee can and burying it in their backyard. Obviously, mattress-stuffing is a safe way to go, but that lazy cash will definitely lose value over time, its value eroded away by inflation. This economy has everyone worried about their investments, but there's no need to panic. There are still safe places to invest your dollars:

Gold - Since the global financial crisis began back in 2007, investors have been looking for safe places to grow their money. Institutional and individual investors have been buying gold, both the metal and stock in companies that mine and process gold. The price on gold will almost certainly increase into 2009 and probably into 2010 as well. The federal government has reacted to the triple threat of a) the real possibility of a deep and protracted recession b) financial market turmoil and c) the threat of deflation by dumping vast quantities of cheap cash into the American banking system, and all this cheap money will eventually make its way into the economy. When that happens, inflation will rear its ugly head, and investors will buy even more gold, as a hedge against rising prices.

Peer to Peer Lending Networks - Peer to Peer (P2P) Lending Networks like Lending Club have been gaining in popularity as individuals and businesses find it virtually impossible to secure financing from banks and other financial institutions. Currently, Lending Club offers investors returns in the range of 6.69% to 19.37% (the average return is 9.05%.) If you're interested in a short-term investment and you're willing to take on some risk, investing in P2P lending may be an option for you. Research the network you're planning to lend with. Find out the average loan default rate and carefully consider whether it's a system that you are comfortable with. Most lending networks allow you to provide micro-loans to borrowers, which you can use to get your feet wet.

High Yield Certificate of Deposit - A certificate of deposit (CD) is a type of deposit account that invariably offers a higher yield than a standard savings account. CD's are considered relatively safe and provide a decent return on your investment. Before investing in a CD, use your favorite search engines (don't rely on Google alone! Yahoo! has a great search engine too!) to research the financial institution you plan on using. If you find complaints about fraudulent activity or poor customer service or worse, then stay far away from that particular financial institution. The last thing you want is to have your money tied up in CD's provided by a fraudulent company like Stanford Financial.


Credit unions have weathered the financial storms of recent months well. If you can join one, it's a great idea to buy a CD with a credit union (a CD at a credit union is called a share certificate.)

Debt Reduction - Reducing your debt should at the top of your financial to-do list regardless of the state of the economy. Carrying an oppressive debt load during a recession can bring ruin to a once thriving household, and nobody wants to be forced into moving back with their parents. If you are looking for a safe and smart place to invest your money, consider investing in your financial future by reducing your debt. Every balance you reduce or pay off will increase your monthly cash flow, and that liberated cash can be used for investing.

Stocks - Experienced investors know that a recession can bring great opportunities to make fast money. With real estate and stock markets plummeting globally, the biggest losers are, generally speaking, small to mid-sized companies and fast moving consumer goods (FMCG) stocks. Companies that have had a substantial market share for more than 25 years are far more likely to survive this and future recessions. It's important to diversify your portfolio and sell stocks of companies that are unlikely to survive the current crisis. Look for strength and obvious opportunities. Companies that are sitting on huge piles of cash -- $10 billion dollars or more -- are strong. If a company's stock price is cheaper than that same company's earnings, then owning a piece of that company is probably a good idea.

July 22, 2020 Update: Click here for an excellent list of recession-proof businesses.


U.S. Treasuries are also extremely safe. Even if everyone in the United States failed to pay their taxes, the federal government has the power to simply print more money to meet its fiscal obligations. In the current economic environment, however, Treasury bills, notes and bonds are in high demand, which in turn has caused their yields to drop dramatically. Bottom line: there's almost no point in investing in e.g. a 12-month Treasury bill when the yield is less than 1%.
It's always a good idea to have a strong cash position during an economic downturn, but overdoing it can seriously compromise your plans for a comfortable retirement. Investing during a recession can be tricky, but with knowledge and some courage, even the most cautious investor can invest with confidence and, most importantly, stay ahead of inflation.

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