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Friday, March 02, 2007

Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 75%

There was some positive economic news on Thursday, as the Institute for Supply Management reported that their Purchasing Manager's Index (PMI) was 52.3% for February, 2007, which implies that manufacturing in the United States is expanding (a figure above 50% implies expansion, below 50% implies contraction; the January figure was 49.3%.) Positive news about U.S. manufacturing often translates to a decreased likelihood that the Fed will lower short-term rates, but the positive news was trumped by news of continued troubles for the nation's subprime mortgage industry.

Countrywide Financial, the nation's #1 independent mortgage company, recently reported that at the end of 2006, payments were late on nearly 20% of subprime loans. Yup: the bad news from the nation's subprime mortgage industry keeps coming (see previous bad news here and here); don't be surprised if we get more bad news in the coming weeks and months.

Over the past 12 months, more than twenty lenders have either shut down or put up a "for sale" sign as a result of bad home loans.

Investors have reacted to the latest bad news from the subprime mortgage industry: according to the pricing on Fed Funds Futures contracts, the Fed is now more likely to lower short-term interest rates later this year.

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 75% (according to current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the June 28TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:
  • Current odds that the Prime Rate will be cut to 8.00% after the June 28TH FOMC monetary policy meeting: 75% (somewhat likely)
  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned for the latest odds. Odds may experience a significant shift on the release of the following economic report:

  • Friday, March 9, 2007: The Labor Department releases the Employment Situation report for February.
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