Prime Rate

Fourth FOMC Meeting of 2008 Adjourned: The Prime Rate Remains at 5.00%

2008-06-25T15:07:00.006-04:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its fourth monetary policy meeting of 2008, and, in keeping with the latest forecast, the FOMC has voted to leave short-term interest rates at their current level. Therefore, the benchmark Federal Funds Target Rate will remain at 2.00%, and the Wall Street Journal® Prime Rate (also known as the U.S., Fed or national Prime Rate) will remain at the current 5.00%.

Here's a clip from the press release that was issued by the FOMC earlier this afternoon:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting."

Futures Market 92% Certain That The Fed Is Done with Cutting Rates for Now

2008-05-22T15:47:00.038-04:00

If you've been waiting for just the right time to borrow money, then there is some great news for you today: it's likely that the Fed is done with the current cycle of rate cuts. This means that short-term interest rates, including the U.S. Prime Rate (currently at 5.0%), are not likely to go any lower this year. This is a great time to lock in a favorable rate on a non-mortgage loan, especially if the loan in question has a fixed interest rate (FYI: if it's a home loan you're after, mortgage rates are still looking good).

The futures market currently has odds at 92% that the Federal Open Market Committee (FOMC) will leave the benchmark Fed Funds Target Rate at its current level of 2.0% when the group meets on June 25^TH, 2008. 8% in the market are betting that the Fed will cut short-term rates by 25 basis points (0.25 percentage point) on June 25^TH.

Recent news that has influenced the futures market this week:

Speaking in New Orleans on May 20, Fed Vice Chairman Donald Kohn had this to say (clip):

"...With the information now in hand, it is my judgment that monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term. But a large measure of uncertainty surrounds that judgment and as the economy evolves, so will the appropriate stance of policy..."
And here's a clip from the recently released minutes from the April 29-30 FOMC monetary policy meeting:

"...In the Committee's discussion of monetary policy for the intermeeeting period, most members judged that policy should be eased by 25 basis points at this meeting. Although prospects for economic activity had not deteriorated significantly since the March meeting, the outlook for growth and employment remained weak and slack in resource utilization was likely to increase. An additional easing in policy would help to foster moderate growth over time without impeding a moderation in inflation. Moreover, although the likelihood that economic activity would be severely disrupted by a sharp deterioration in financial markets had apparently receded, most members thought that the risks to economic growth were still skewed to the downside. A reduction in interest rates would help to mitigate those risks. However, most members viewed the decision to reduce interest rates at this meeting as a close call..."

Of course, the incessant rise of crude oil prices isn't making the Fed's job any easier. Crude oil for future delivery is currently trading at a staggering $130.55 per barrel in New York, which is basically tantamount to throwing a big, wet towel over the U.S. economy, while at the same time stoking the flames of inflation. Yuck.

Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 92% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark Federal Funds Target Rate at the current 2.0% at the June 25^TH, 2008 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 5.0% after the June 25^TH, 2008 FOMC monetary policy meeting: 92% (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.

U.S. Prime Rate Is Now 5.00%

2008-04-30T14:28:00.004-04:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its third, regularly scheduled monetary policy meeting of 2008, and, in accordance with the latest forecast, has just lowered its target for the Federal Funds Rate by 25 basis points (0.25 percentage point) to 2.00%. Therefore, as of today, the U.S. Prime Rate is now 5.00%. Many American banks have already issued a press release announcing that their prime lending rate has been lowered from 5.25 to 5.00%.

Here's a clip from a press release issued by the FOMC earlier today:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.

Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta, and San Francisco."

Fed Likely to Cut Short-Term Rates by 25 Basis Points On Wednesday

2008-04-28T12:59:00.016-04:00

The next Federal Open Market Committee (FOMC) monetary policy meeting is just 2 days away, and right now the fed funds futures market is pretty confident that the Fed will cut short-term rates by 25 basis points (0.25 percentage point) on Wednesday.

The futures market currently has odds at 80% that the Fed will cut the benchmark Fed Funds Target Rate by 25 basis points two days from now. 20% in the market are betting that the Fed will leave short-term rates at their current level when the next FOMC meeting adjourns on Wednesday.

Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 80% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the April 30^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 April 30^TH FOMC monetary policy meeting: 80% (likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Fed Will Cut Short-Term Rates On April 30; Odds On 50 Basis Point Cut Rising

2008-04-09T19:35:00.022-04:00

The fed funds futures market currently has odds at 60% that the Fed will cut the benchmark Fed Funds Target Rate by 25 basis points (0.25 percentage point) at the April 30^TH FOMC monetary policy meeting. 40% are betting that the Fed will cut short-term rates by 50 basis points at the end of the month.

Recent economic news influencing the futures market:

The U.S. economy got weaker by 80,000 jobs last month, according to the Labor Department's most recent jobs report, while the unemployment rate rose from 4.8% to 5.1%. The total number of nonfarm payrolls lost since the beginning of 2008 now stands at 232,000.
Last Wednesday, the U.S. Census Bureau reported that factory orders declined by 1.3% during February 2008. Wall Street economists were expecting a decline of about 0.6%.
Last Tuesday, the Institute for Supply Management reported that the Purchasing Manager's Index (PMI) advanced from 48.3 for February to 48.6% for March. Though the recent figure indicates some improvement, any figure below 50% suggests that, generally, the American manufacturing sector is contracting.
Also last Tuesday, the U.S. Census Bureau reported that construction spending fell by 0.3% during February 2008. Wall Street economists were expecting a decline of about 1.1%. When comparing 02/2007 to 02/2008, construction spending was down by 3.5%.
In prepared remarks before the U.S. Senate Committee on Banking, Housing, and Urban Affairs last Thursday, Fed boss Ben Bernanke made the following comments:

"...Although the situation has recently improved somewhat, financial markets remain under considerable stress. Pressures in short-term bank funding markets, which had abated somewhat beginning late last year, have increased once again. Many lenders have been reluctant to provide credit to counterparties, especially leveraged investors, and increased the amount of collateral they required to back short-term security financing agreements. To meet those demands, investors have reduced their leverage and liquidated holdings of securities, putting further downward pressure on security prices. Credit availability has also been restricted because some large financial institutions, including some commercial and investment banks and the government-sponsored enterprises (GSEs), have reported substantial losses and writedowns, reducing their capital available to support increased lending. Some key securitization markets, including those for nonconforming mortgages, continue to function poorly if at all.

These developments in financial markets--which themselves reflect, in part, greater concerns about housing and the economic outlook more generally--have weighed on real economic activity. Notably, in the housing market, sales of both new and existing homes have generally continued weak, partly as a result of the reduced availability of mortgage credit, and home prices have continued to fall. Private payroll employment fell substantially in February, after two months of smaller job losses, with job cuts in construction and closely related industries accounting for a significant share of the decline. But the demand for labor has also moderated recently in other industries. Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. Inflation has also been a source of concern. We expect inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully..."
And here's a clip from Ben Bernanke's testimony before the Joint Economic Committee of the U.S. Congress last Wednesday:

"...Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly. We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies; and growth is expected to proceed at or a little above its sustainable pace in 2009, bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions. However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside.

Inflation has also been a source of concern. The price index for personal consumption expenditures rose 3.4 percent over the twelve months ending in February, up from 2.3 percent over the preceding twelve-month period. To a large extent, this pickup in inflation has been the result of sharp increases in the prices of crude oil, agricultural products, and other globally traded commodities. Additionally, the decline in the foreign exchange value of the dollar has boosted some non-commodity import prices and thus contributed to inflation. However, the so-called core rate of inflation--that is, inflation excluding food and energy prices--has edged down recently after firming somewhat late last year..."

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the April 30^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 April 30^TH FOMC monetary policy meeting: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market Certain The Fed Will Cut Rates Again on April 30

2008-03-25T12:41:00.007-04:00

The Fed has cut short-term rates aggressively -- by 300 basis points (3.00 percentage points) since mid-September of last year -- in an attempt to inject vitality into the sluggish economy and help ease turmoil in credit markets. The Fed doesn't want to cut rates by too much, which could easily create another wave of asset bubbles in the future. According to current odds from the fed funds futures market, however, the Fed will cut again on April 30.

Recent economic news influencing the futures market:

Last Thursday, The Conference Board reported that the nation's leading economic indicators fell by 0.3% during February 2008, which is what Wall Street economists were expecting.
Also last Thursday, the Federal Reserve Bank of Philadelphia reported that its diffusion index of current manufacturing activity in the Philadelphia area (the Fed's Third District) came in at -17.4 for this month. Any figure below zero indicates that manufacturing in the Fed's Philadelphia region is contracting, while a positive figure implies expansion. The Fed's Third District includes all of Delaware, parts of southern New Jersey, and a large section of eastern Pennsylvania.
Yesterday, the National Association of Realtors® released its report on sales of previously owned homes for February. Though sales of previously occupied homes improved during February, the median and average price for a used home declined for the third straight month. According to preliminary estimates, the median price on a used home in the United States was $195,900, while the average price was $241,900.
Earlier today, The Conference Board reported that the Consumer Confidence Index (CCI) fell to 64.5 this month. Wall Street economists were expecting ~73.0. The CCI has been declining from month to month since last summer (the July 2007 figure was 111.9.) For the CCI, the baseline score of 100 is associated with 1985 survey results.

Right now, the fed funds futures market has odds at 66% that the Fed will cut the benchmark Fed Funds Target Rate by 25 basis points (0.25 percentage point) at the April 30^TH FOMC monetary policy meeting. 34% are betting that the Fed will cut short-term rates by 50 basis points at the end of next month.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the April 30^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 April 30^TH FOMC monetary policy meeting: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

U.S. Prime Rate Is Now 5.25%

2008-03-18T14:23:00.008-04:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its second, regularly scheduled monetary policy meeting of 2008, and has just lowered its target for the Federal Funds Rate by 75 basis points (0.75 percentage point) to 2.25%. Therefore, as of today, the U.S. Prime Rate is now 5.25%. Many American banks have already issued a press release announcing that their prime lending rate has been lowered from 6.00% to 5.25%.

Here's a clip from a press release issued by the FOMC earlier today:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco."

Fed Will Cut Short-Term Rates by At Least 100 Basis Points Tomorrow

2008-03-17T18:14:00.010-04:00

Shares of the investment bank Bear Stearns fell 87% today to close at $4.81. The stock was at $145.49 on March 19, 2007. Though a rescue plan is in place for Bear (the company will likely be sold to JPMorgan Chase at a fire sale price), the Fed is still worried about the health of the financial sector. Confidence is evaporating fast, and the everyone is counting on the Fed to use its powers to help stabilize the system.

Credit markets need a serious boost, and the Fed will deliver. Yesterday, the FOMC lowered the discount rate by 25 basis points to 3.25%. In all likelihood, the FOMC will lower the Fed Funds Target Rate by at least 100 basis points tomorrow afternoon.

Right now, the fed funds futures market has odds at 84% that the Fed will cut the benchmark Fed Funds Target Rate by 100 basis points (1.00 percentage point) at the March 18^TH FOMC monetary policy meeting. 16% are betting that the Fed will cut short-term rates by 125 basis points tomorrow.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 100 basis points (1.00 percentage point) at the March 18^TH, 2008 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will be cut by at least 100 basis points at the March 18^TH FOMC monetary policy meeting: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Short-Term Rates Very Likely to be Cut By At Least 75 Basis Points On Tuesday

2008-03-15T16:45:00.035-04:00

With all the somber economic news in the business headlines lately, one thing is clear: the Fed wants to cut rates aggressively when the Federal Open Market Committee (FOMC) meets on March 18 (Tuesday.)

However, cutting short-term rates aggressively with the concurrent problem of rising prices could hurt the FOMC's credibility. For sure, no one wants a return of 1970's-style inflation.

How bad is inflation right now? Well, to get an idea: crude oil for future delivery finished the week at a staggering $110.21 per barrel, while New York Spot Gold ended the week at $1,002.50 per ounce.

The fed funds futures market is now indicating that the Fed may cut short-term rates by as much as 100 basis points (1.00 percentage point) on March 18. That's very, very aggressive. Is the Fed really going to execute such a large rate cut when so many prominent economists are worried about inflation? Yes, it is.

The Fed is very likely to cut by at least 75 basis points on Tuesday. The twofold justification for such a large cut came on Friday:

For some time, the FOMC has stated that it "expects inflation to moderate in coming quarters." The February 2008 Consumer Price Index (CPI) figures bear out the group's assertion. According to the Labor Department report, both the CPI and the core CPI advanced by less than 0.1% on a seasonally-adjusted basis last month. Bottom line: the CPI figures for February are, in essence, the Fed's license to cut aggressively on Tuesday.
The U.S. #5 investment bank Bear Stearns is strapped for cash. Bear Stearns stock price fell 47.37% on Friday to close @ $30.00 per share. A year ago, the stock was trading at $143.68. JPMorgan Chase bank borrowed money directly from the Federal Reserve via the Fed's discount window, and then lent that same cash to Bear. The Fed is assuming all the risk for this loan. Bear Stearns may be sold in the near future.

Is the U.S. economy already in recession? We'll have to wait until April 30 for the answer. That's when the Commerce Department is set to release the "advance" Gross Domestic Product (GDP) report for Q1, 2008.

Yesterday, the fed funds futures market had odds at 60% that the Fed will cut the benchmark Fed Funds Target Rate by 100 basis points (1.00 percentage point) at the March 18^TH FOMC monetary policy meeting. 40% are betting that the Fed will cut short-term rates by 75 basis points on March 18^TH.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 75 basis points (0.75 percentage point) at the March 18^TH, 2008 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will be cut by at least 75 basis points at the March 18^TH FOMC monetary policy meeting: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Odds On A 75 Basis Point Rate Cut for March 18 Hit 96% On Weak Jobs Report

2008-03-10T06:09:00.035-04:00

Thanks to a surprisingly anemic jobs report, and other economic news suggesting that a recession may be in the offing, the fed funds futures market is now 100% certain that the Fed will cut short-term rates by at least 75 basis points (0.75 percentage point) this month.

On Friday, the Labor Department reported that nonfarm payrolls declined by 63,000 during February 2008. Wall Street economists were expecting payrolls to advance by about 25,000. What's worse, the nonfarm payrolls figure for January was revised down from a loss of 17,000 jobs to a loss of 22,000. The latest employment figures have led many economists to believe that the U.S. economy is already in a recession.
The stock market recoiled in response to the February jobs report. Since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) is now 2,270.84 points (16.032%) lower, while the S&P 500 Index has shed 271.78 points (17.364%.)
The prospect of an imminent and aggressive rate cut from the Fed has precipitated a further weakening of the dollar and has helped to send crude oil prices to record highs. By Friday evening, one euro could be traded for $1.5356 in New York, while one dollar bought 0.6512 euro. The price on crude oil for future delivery closed at $105.15 per barrel.
On Monday, the Institute for Supply Management reported that the Purchasing Manager's Index (PMI) fell from 50.7% for January to 48.3% for February. Any figure above 50% suggests that, generally, U.S. manufacturing is expanding, while any figure below 50% suggests that the American manufacturing sector is contracting.
On Friday, the Federal Reserve announced that it will expand its Term Auction Facility (TAF) in a continuing effort to keep financial markets from seizing up.

As of right now, the fed funds futures market has odds at 96% that the Fed will cut the benchmark Fed Funds Target Rate by 75 basis points (0.75 percentage point) at or before the March 18^TH Federal Open Market Committee (FOMC) monetary policy meeting. A 4% minority in the futures market are betting that the Fed will cut short-term rates by 100 basis points at some point between now and March 18^TH.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 75 basis points (0.75 percentage point) at or before the March 18^TH, 2008 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will be cut by at least 75 basis points at or before the March 18^TH FOMC monetary policy meeting: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market Certain of 50 Basis Point Cut Despite Rising Prices

2008-02-28T17:41:00.030-05:00

Two days ago, the Labor Department reported that wholesale prices rose by a very ugly 1.0% during January 2008. Consumer prices rose by 0.4% during the same month. Crude oil for future delivery is currently trading at $102.24 per barrel (no, that's not a typo), while New York Spot Gold finished the day at $969.50 per ounce. With inflation stealing current economic news headlines, how is it that the fed funds futures market is once again 100% certain that the Fed will cut short-term rates by at least 50 basis points (0.50 percentage point) by March 18?

Here's what Fed boss Ben Bernanke had to say about it in testimony before Congress yesterday:

"...The economic situation has become distinctly less favorable since the time of our July report. Strains in financial markets, which first became evident late last summer, have persisted; and pressures on bank capital and the continued poor functioning of markets for securitized credit have led to tighter credit conditions for many households and businesses. The growth of real gross domestic product (GDP) held up well through the third quarter despite the financial turmoil, but it has since slowed sharply. Labor market conditions have similarly softened, as job creation has slowed and the unemployment rate--at 4.9 percent in January--has moved up somewhat.

Many of the challenges now facing our economy stem from the continuing contraction of the U.S. housing market. In 2006, after a multiyear boom in residential construction and house prices, the housing market reversed course. Housing starts and sales of new homes are now less than half of their respective peaks, and house prices have flattened or declined in most areas. Changes in the availability of mortgage credit amplified the swings in the housing market. During the housing sector's expansion phase, increasingly lax lending standards, particularly in the subprime market, raised the effective demand for housing, pushing up prices and stimulating construction activity. As the housing market began to turn down, however, the slump in subprime mortgage originations, together with a more general tightening of credit conditions, has served to increase the severity of the downturn. Weaker house prices in turn have contributed to the deterioration in the performance of mortgage-related securities and reduced the availability of mortgage credit.

The housing market is expected to continue to weigh on economic activity in coming quarters. Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries...

...The rate of inflation that is actually realized will of course depend on a variety of factors. Inflation could be lower than we anticipate if slower-than-expected global growth moderates the pressure on the prices of energy and other commodities or if rates of domestic resource utilization fall more than we currently expect. Upside risks to the inflation projection are also present, however, including the possibilities that energy and food prices do not flatten out or that the pass-through to core prices from higher commodity prices and from the weaker dollar may be greater than we anticipate. Indeed, the further increases in the prices of energy and other commodities in recent weeks, together with the latest data on consumer prices, suggest slightly greater upside risks to the projections of both overall and core inflation than we saw last month. Should high rates of overall inflation persist, the possibility also exists that inflation expectations could become less well anchored. Any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and could reduce the flexibility of the FOMC to counter shortfalls in growth in the future. Accordingly, in the months ahead, the Federal Reserve will continue to monitor closely inflation and inflation expectations..."

Other economic news supporting predictions that the Fed will cut aggressively next month:

Housing: On Monday, the National Association of Realtors® reported that sales of previously occupied homes fell by 0.4% last month. Between 01/2007 and 01/2008, sales of used homes were down 23.4%. And according to preliminary estimates, the median cost of a used home fell to $201,100, while the average price sank to $247,700.
Housing: On Wednesday, the Commerce Department reported that sales of newly built (virgin) homes fell by 2.8% last month. Between 01/2007 and 01/2008, sales of new homes were down 33.9%. According to preliminary estimates, the median price of a brand new home declined to $216,000.
Consumer Spending: On Tuesday, The Conference Board reported that the Consumer Confidence Index (CCI) fell to 75.0 for this month (February.) Wall Street economists were expecting the figure to come in at around 81.3. The CCI has been declining since the summer of 2007 (the 07/07 figure was 111.9.) For the CCI, the baseline score of 100 is associated with 1985 survey results.
Manufacturing: Yesterday, the Commerce Department reported the orders for durable goods fell by 5.3% last month. Wall Street was expecting a decline of about 3.5%. Durable goods = items built to last 3 years or more, like airplanes, cars and cooking ranges.

As of right now, the fed funds futures market has odds at 62% that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) at or before the March 18^TH Federal Open Market Committee (FOMC) monetary policy meeting. A 38% minority in the futures market are betting that the Fed will cut short-term rates by 75 basis points at some point between now and March 18^TH.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 50 basis points (0.50 percentage point) at or before the March 18^TH, 2008 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will be cut by at least 50 basis points at or before the March 18^TH FOMC monetary policy meeting: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Odds On A 50 Basis Point Cut for Short-Term Rates Now at 96%

2008-02-22T19:04:00.022-05:00

Currently, the fed funds futures market is nearly certain the Fed will cut short-term rates by 50 basis points (0.50 percentage point) on or before March 18, despite economic news this week that has many economists concerned about rising prices:

On Wednesday, the Labor Department released the Consumer Price Index (CPI) figures for January 2008. Consumer prices rose by 0.4% last month, while Wall Street economists were expecting an increase of 0.3%. From January 2007 through January 2008, the CPI increased by 4.3%: not a healthy figure.
The price on crude oil for future delivery closed at $98.81 today; crude topped $100 per barrel earlier this week. The price on New York Spot Gold closed at $944.60 earlier this afternoon.

On the flip side, contributing to the likelihood the Fed will cut by 50 instead of 25, the Federal Reserve Bank of Philadelphia reported yesterday that its diffusion index of current manufacturing activity in the Philadelphia area (the Fed's Third District) fell from -20.9 for January to -24.0 for this month. Any figure below zero indicates that manufacturing in the Fed's Philadelphia region is contracting, while a positive figure implies expansion. The Fed's Third District includes all of Delaware, parts of southern New Jersey, and a large section of eastern Pennsylvania.

As of right now, the fed funds futures market has odds at 96% that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) at or before the March 18^TH Federal Open Market Committee (FOMC) monetary policy meeting. A 4% minority in the futures market are betting that the Fed will cut short-term rates by only 25 basis points at some point between now and March 18^TH.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at or before the March 18^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 or before the March 18^TH FOMC monetary policy meeting: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market Still Certain Fed Will Cut Short-Term Rates by At Least 50 Basis Points

2008-02-14T16:31:00.000-05:00

In prepared testimony made before the U.S. Senate Committee on Banking, Housing, and Urban Affairs earlier today, Fed boss Ben Bernanke made it pretty clear that the Fed will be cutting short-term rates in the near future -- no surprise really. Here's a clip:

"...A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives of maximum employment and price stability and, in particular, whether the policy actions taken thus far are having their intended effects. Monetary policy works with a lag. Therefore, our policy stance must be determined in light of the medium-term forecast for real activity and inflation, as well as the risks to that forecast. At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt. At the same time, overall consumer price inflation should moderate from its recent rates, and the public's longer-term inflation expectations should remain reasonably well anchored.

Although the baseline outlook envisions an improving picture, it is important to recognize that downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or that credit conditions may tighten substantially further. The FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks."

As of right now, the fed funds futures market has odds at 74% that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) at or before the March 18 Federal Open Market Committee (FOMC) monetary policy meeting. A 26% minority in the futures market are betting that the Fed will cut short-term rates by 75 basis points at some point between now and March 18.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 50 basis points (0.50 percentage point) at or before the March 18^TH, 2008 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will be cut by at least 50 basis points at or before the March 18^TH FOMC monetary policy meeting: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market Certain of A 50 Basis Point Cut On or Before March 18

2008-02-07T20:27:00.000-05:00

Recession fears intensified Tuesday after investors had a chance to digest the numbers from the Institute for Supply Management's Business Activity Index. The index nosedived last month, from 54.4% for December to 41.9% for January. The scale of the decline was punctuated by the fact that any figure below 50% suggests that non-manufacturing sectors of the U.S. economy are contracting.

The Business Activity Index has been shrinking since the summer of last year, but only recently declined precipitously:

August 2007: 56.3%
September 2007: 55.7%
October 2007: 55.5%
November 2007: 54.6%
December 2007: 54.4%
January 2008: 41.9%

Here's a clip from the January report:

"...The industries reporting growth of business activity in January are: Utilities and Educational Services. The industries reporting decreased business activity in January are: Arts, Entertainment & Recreation; Agriculture, Forestry, Fishing & Hunting; Accommodation & Food Services; Health Care & Social Assistance; Transportation & Warehousing; Real Estate, Rental & Leasing; Management of Companies and Support Services; Construction; Wholesale Trade; Finance & Insurance; Information; Retail Trade; Public Administration; and Professional, Scientific & Technical Services..."

As of this evening, the fed funds futures market has odds at 80% that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) at or before the March 18 Federal Open Market Committee (FOMC) monetary policy meeting. A 20% minority in the futures market are betting that the Fed will cut short-term rates by 75 basis points between now and March 18.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 50 basis points (0.50 percentage point) at or before the March 18^TH, 2008 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will be cut by at least 50 basis points at or before the March 18^TH FOMC monetary policy meeting: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

U.S. Prime Rate Is Now 6.00%

2008-01-30T14:29:00.000-05:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its first, regularly scheduled monetary policy meeting of 2008, and, in accordance with the latest forecast, the FOMC has just lowered its target for the Federal Funds Rate by 50 basis points (0.50 percentage point) to 3.00%. Therefore, as of today, the U.S. Prime Rate is now 6.00%. Many American banks have already issued a press release announcing that their prime lending rate has been lowered from 6.50% to 6.00%.

Here's a clip from a press release issued by the FOMC earlier today:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco."

Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 67% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the March 18^TH, 2008 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will be cut by 25 basis points at the March 18^TH FOMC monetary policy meeting: 67% (more likely than unlikely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Fed Decision Imminent: Odds On A 50 Basis Point Cut at 74%

2008-01-30T13:27:00.000-05:00

The economy grew by 0.6% during the fourth quarter of 2007, according to the "advance" estimate released by the Commerce Department this morning. Wall Street economists were expecting around 1.2%. 0.6% growth is certainly slow enough for the Fed to cut aggressively, as expected. The odds that the Fed will cut short-term rates by 50 basis points (0.50 percentage point) are currently at 74%, while odds on a 25 basis point cut are at 26%.

The decision on interest rates will be released in less than one hour. Stay tuned.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) today.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will be cut by at least 25 basis points today: 100% (certain)
Current odds that the Prime Rate will be cut by 50 basis points today: 74% (more likely than unlikely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Odds on The Fed Cutting by 50 Basis Points Tomorrow at 76% Despite Encouraging Report on Orders for Durable Goods

2008-01-29T18:09:00.000-05:00

Some positive news from the economic front today: the Commerce Department reported that new orders for durable, manufactured goods -- products built to last 3 years or more, like DVD players, war planes and cooking ranges -- rose by $11.2 billion (5.2%) during December 2007. Wall Street economists were expecting an increase of about 1.6%. Despite this positive economic news, the fed funds futures market is still 76% certain that the Fed will opt for a 50 basis point (0.50 percentage point) cut for short-term rates tomorrow. The odds on a 25 basis point cut are currently at 24%.

On the negative side, earlier today the Conference Board reported that the Consumer Confidence Index (CCI) fell from last month's 90.6 to 87.9 for this month; discouraging news from a consumer spending perspective. Here are the CCI figures since the summer of last year:

July 2007: 111.9
August 2007: 105.6
September 2007: 99.5
October 2007: 95.2
November 2007: 87.8
December 2007: 90.6
January 2008: 87.9 (preliminary)

For the CCI, the baseline score of 100 is pegged to 1985 survey results.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at tomorrow's 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 tomorrow's FOMC monetary policy meeting: 100% (certain)
Current odds that the Prime Rate will be cut by 50 basis points at tomorrow's FOMC monetary policy meeting: 76% (more likely than unlikely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Odds On A 50 Basis Point Cut for January 30 Now at 78%

2008-01-27T17:12:00.000-05:00

The Fed will make its next decision on short-term interest rates on January 30, and as we approach that date, the odds from the fed funds futures market have, with increasing confidence, been predicting that the Fed will opt for a 50 basis point (0.50 percentage point) cut. The odds on a 50 basis point cut for the benchmark Fed Funds Target Rate now stand at 78%, and the remaining odds -- 22% -- are for a 25 basis point cut.

Let's have a quick look at what might have influenced the futures market recently.

Though both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index advanced on the week, both indexes are still down significantly since each peaked last fall. Since closing with all-time highs on October 9, 2007, the DJIA is now down 1,957.36 points (13.819%), while the S&P 500 is down 234.54 points (14.985%).

The yield on the benchmark 10-Year Treasury Note fell to 3.584%. For some perspective, the yield was 4.65% on October 9, 2007.

Also notable: New York Spot Gold closed at $910.50 per ounce on Friday.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the January 30^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 January 30^TH FOMC monetary policy meeting: 100% (certain)
Current odds that the Prime Rate will be cut by 50 basis points at the January 30^TH FOMC monetary policy meeting: 78% (more likely than unlikely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market Still Certain Of Rate Cut for January 30; Odds On A 50 Basis Point Cut Now at 68%

2008-01-24T15:53:00.000-05:00

Last Saturday, while most Wall Street economists were predicting that the Fed would cut rates by 50 basis points by January 30, the fed funds futures market was 72% certain that the Fed would cut by 75 basis points at or before the January 30 Federal Open Market Committee (FOMC) meeting. On Tuesday, we learned that the futures market had indeed nailed it, as usual. The Fed executed an intermeeting rate cut of 75 basis points, prompted by significant market losses in Asia and Europe on the Martin Luther King holiday.

The stock market has been looking healthier since Tuesday. The Dow Jones Industrial Average (DJIA) gained 108.44 points today, while the S&P 500 advanced by 13.47. Another positive piece of news: crude oil for future delivery is currently trading at $89.61 per barrel (crude closed at $97.91 on January 4, 2008.)

On the negative side, New York Spot Gold closed at $912.30 per ounce today, and the yield on the 10-Year Treasury Note closed at 3.64%. In other words: money is still moving to safe havens.

The news that has almost certainly been influencing the fed funds futures market the most today came from the housing sector. Earlier today, the National Association of Realtors® reported that sales of previously occupied homes fell by 2.2% last month, and sales were down by 22% from December '06 to December '07. The median price for a preowned home fell to $208,400, while the average price fell to $254.900 (preliminary data.) In the Northeast United States, the median price on a used home was down 8.9% for the December '06 to December '07 period.

The fed funds futures market is still 100% certain that the Fed will cut short-term rates by at least 25 basis points (0.25 percentage point) when the FOMC meets on January 30. As of right now, the market has odds at 68% that the Fed will cut short-term rates by 50 basis points, and current odds are at 32% that the Fed will opt instead for a 25 basis point cut on January 30.

Here's what these odds mean to all you hard working consumers out there: You can expect any loan that's tied to the WSJ Prime Rate (home equity lines of credit, variable-rate credit cards, business loans, personal loans, etc.) to be 1.00 percentage point lower by March (or April at the latest.) So if you have a variable-rate credit card that's indexed to Prime, and your current APR is 12%, you can look forward to your rate dropping to 11% within the next 2 months.

For those of you with a mortgage indexed to LIBOR, another Fed rate cut at the end of this month is great news for you too, because the LIBOR rates tend to move in tandem with the benchmark Fed Funds Target Rate.

If you've been patiently waiting for just the right time to borrow, then you may want to wait a little while longer. The current cycle of Fed rate cuts may continue after January. Stay tuned for the latest odds.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the January 30^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 January 30^TH FOMC monetary policy meeting: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

U.S. Prime Rate Is Now 6.50%

2008-01-22T13:36:00.000-05:00

Earlier today, the Federal Open Market Committee (FOMC) of the Federal Reserve adjourned an emergency monetary policy meeting, and, in accordance with the latest forecast, the FOMC has just lowered its target for the Federal Funds Rate by 75 basis points (0.75 percentage point) to 3.50%. Therefore, as of today, the U.S. Prime Rate is now 6.50%. Many American banks have already issued a press release announcing that their prime lending rate has been lowered from 7.25% to 6.50%.

Here's a clip from a press release issued by the FOMC earlier today:

"The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.

In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis."

Despite today's intermeeting move by the Fed, the futures market is 100% certain that the Fed will cut short-term rates again on January 30^TH.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the January 30^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 January 30^TH FOMC monetary policy meeting: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Odds That The Fed Will Cut Short-Term Rates by 75 Basis Points Now at 72%

2008-01-19T16:30:00.000-05:00

Despite a significant rise for the Consumer Sentiment Index this month -- from 75.5 for December to 80.5 for January -- investors pulled more money out of stocks and into safer investments like U.S. Treasuries. Since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) has now lost 2,065.23 points (14.58%), while the S&P 500 has lost 239.96 points (15.331%). Yikes! On Friday, the yield on the 10-Year Treasury Note fell to 3.648%.

Last week, I remarked at how intense the odds from the fed funds futures market were looking. This week, the odds are still pretty intense. No one is betting that the Fed will cut rates by a wimpy 25 basis points (0.25 percentage point) by January 30 anymore. The future market now sees a 72% chance that the Fed will cut the benchmark Fed Funds Target Rate by 75 basis points (0.75 percentage point) by January 30^TH. In other words, the futures market believes, with 100% certainty, that the Fed will cut short-term rates by at least 50 basis points by the end of the month, with odds at 28% that we will get a cut of no more than 50 basis points by January 30^TH.

What do these odds mean in real world terms? Well, if you have a variable-rate credit card that's indexed to the WSJ Prime Rate, then chances are your APR will be 0.50 percentage point lower by the time January 31 arrives. This is true for any loan or credit product that's tied to the U.S. Prime Rate. For some consumers, it may take a month or so for your bank to implement the rate change, but it's something you can look forward to.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 50 basis points (0.50 percentage point) at the January 30^TH, 2007 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will be cut by at least 50 basis points at the January 30^TH FOMC monetary policy meeting: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market Now Certain The Fed Will Cut Rates By 50 Basis Points On January 30

2008-01-12T20:37:00.000-05:00

There was good news from the distressed financial sector this week: Bank of America is buying mortgage-origination behemoth Countrywide Financial. Countrywide, which is the nation's #1 home-loan lender, has taken a beating in the wake of the subprime mortgage crisis, and there were rumors that the company might file for bankruptcy.

But the good news about Countrywide wasn't enough to keep the stock market from losing ground this week. In fact, since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) has lost 1,558.23 points (11.0%), while the S&P 500 has given up 164.13 points (10.487%). On Friday, New York Spot Gold crept closer to the $900 mark, and the yield on the 10-year treasury note fell to 3.81%.

Right now, the fed funds futures market thinks the economy is looking bad enough that the Fed will take aggressive action when the Federal Open Market Committee (FOMC) releases its decision on interest rates on January 30. The odds that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) are currently at a very confident 100%; the market is also betting, at 34% odds, that the Fed will either cut rates before the January 30 meeting, or they will opt for a 75 basis point cut at the end of the month. Those are some pretty intense odds.

The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 50 basis points (0.50 percentage point) at the January 30^TH, 2007 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will be cut by at least 50 basis points at the January 30^TH FOMC monetary policy meeting: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)