First FOMC Meeting of 2007 Adjourned: The Prime Rate Remains at 8.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned the first monetary policy meeting of 2007, and, in keeping with the latest forecast, the FOMC elected to leave short-term interest rates at their current level. Therefore, the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street Journal® Prime Rate (also known as the U.S. or national Prime Rate) will remain at the current 8.25%.

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 5-1/4 percent.

Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.

The Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh."

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 4% (according to current pricing on contracts) that the FOMC will vote to lower the benchmark Fed Funds Target Rate by 25 basis points at the June 28^TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• In all likelihood, the Prime Rate will remain at the current 8.25% after the March 21^ST and May 9^TH FOMC monetary policy meetings.
  
  
• Current odds that the Prime Rate will be cut to
  8.00% on June 28^TH, 2007: 4% (very unlikely)
  
  
• 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 reports:

• Friday, February 2, 2007: The Labor Department releases the Employment Situation report for January, 2007.
  
  
• Friday, February 16, 2007: Labor Department releases the Producer Price Index (PPI) report for January, 2007.
  
  
• Wednesday, February 21, 2007: Labor Department releases the Consumer Price Index (CPI) report for January, 2007.

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Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 2%

The Federal Open Market Committee (FOMC) is set to convene their first monetary policy meeting of 2007 on Tuesday; it's a two-day meeting, so they'll announce their decision about interest rates on Wednesday (January 31.)

What do we know right now? We know that the Fed won't tamper with interest rates next week, so, after next week's FOMC meeting, the national Prime Rate will remain at the current 8.25%. At this point, it is also very likely that the Fed will leave interest rates alone at the second FOMC meeting of 2007, which is set to take place on March 21^ST.

The probability that the Fed will cut rates at the end of June dropped to 2% today after investors had a chance to digest reports on housing and durable goods orders:

• The data in the December Existing Home Sales report (released yesterday) were mixed: though inventories were lower and prices showed signs of stabilizing, on a month-to-month basis, existing homes sales declined by 0.8%. Furthermore, on a year-to-year basis (2005-2006), existing home sales declined by 8.4% (2005 was the stronger year on record for existing home sales @ 7,075,000.)
  
  
• The December New Homes Sales numbers were quite positive, with a month-to-month increase of around 4.8%, and inventories dropped from 549,000 homes to 539,000. However, the positive month-to-month numbers were tempered by the year-to-year stats: between 2005 and 2006, new home sales fell by 17.3%.
  
  
• Good news from the manufacturing sector: December Durable Goods Orders were up by 3.1% last month. However, this news was tempered by demoralizing news from the auto industry: Ford Motor recently reported that 2006 was the worst year on record for the company -- a loss of $12.7 billion (that's right: billion.) 2006 was also a bad year for both DaimlerChrysler and General Motors: both companies are expected to report a significant loss for '06.
  

The Fed will cut interest rates later this year only if the U.S. economy needs the boost. What's the prognosis for the U.S. economy? Judging by the money on Wall Street, it's not too bad. When investors are feeling good about the economy's future, they tend to invest less in U.S. treasuries and more in stocks. As demand for government notes declines, the yield on those notes rises. Today, the yield on the benchmark 10-year treasury note rose to 4.879%. About two months ago -- on November 24, 2006 -- the yield on the ten-year note was 4.548.

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 2% (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 28^TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

• In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31^ST and March 21^ST FOMC monetary policy meetings.
  
  
• Current odds that the Prime Rate will be cut to
  8.00% on June 28^TH, 2007: 2% (very unlikely)
  
  
• 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 to this blog for the latest odds.

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Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 12%

If you've been holding your breath in anticipation of a rate cut later this year, then you better have great health insurance. The likelihood of a rate cut for this year has been diminishing steadily over the past few months. And now, based on the latest economic numbers, the Fed is even less likely to lower short-term interest rates later this year.

There were some surprises in this week's economic reports:

• Though consumer prices rose at a pace that economists were expecting last month, wholesale prices increased at a pace that was significantly higher than prognosticators were predicting. Bad news from the Fed's point of view, as many Federal Reserve officials have been and are still expressing concern about inflation. A (very) small minority of economists and investors are now predicting that the Fed may actually raise short-term interest rates by 25 basis points by the end of March in an effort to contain the inflation threat.
  
  
• With plenty of new and preowned homes available for sale right now, economists were expecting around 1,590,000 housing starts last month. The actual figure was 1,642,000.
  

The Latest Odds

As of right now, Fed Funds Futures traders have odds at 12% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the June 28^TH, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

• In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31^ST and March 21^ST FOMC monetary policy meetings.
  
  
• Current odds that the Prime Rate will be cut to
  8.00% on June 28^TH, 2007: 12% (unlikely)
  
  
• 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 to this blog for the latest odds. Odds may experience a significant shift on the release of the following economic reports:

• Thursday, January 25, 2007: The National Association of Realtors releases the Existing Home Sales report for December, 2006.
  
  
• Friday, January 26, 2007: The Commerce Department releases the New Home Sales report for December, 2006.

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Rate Cut for The March 21, 2007 FOMC Monetary Policy Meeting Now Very Unlikely On Release of December Jobs Report

Earlier today, the Department of Labor's Bureau of Labor Statistics released the Employment Situation Report for December, 2006. The December jobs report can be summed up in one word: strong. According to the Labor Department, a healthy 167,000 new jobs were added to U.S. payrolls last month (Wall Street forecasters were expecting around 100,000 new jobs), and the unemployment rate held steady at an economy-friendly 4.5%.

2006 was a good year from a jobs perspective: for the year, the unemployment rate dropped from 4.9% to 4.5%.

With the all-important U.S. employment situation looking favorable, the Fed is now less likely to lower interest rates before mid-2007.


The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 6% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will opt to lower the benchmark Federal Funds Target Rate by 25 basis points at the March 21^ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

• In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31^ST FOMC monetary policy meeting.
  
  
• Current odds that the Prime Rate will be cut to
  8.00% on March 21^ST, 2007: 6% (very unlikely)
  
  
• Current odds that the Prime Rate will be cut to
  8.00% by June 28^TH, 2007: 52% (on the fence)
  
  
• 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 to this weblog for the latest odds.

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FOMC Minutes Released: Fed Still Concerned About Inflation

Earlier today, the Federal Reserve released the minutes from the December 12 FOMC monetary policy meeting: Despite clear sings that inflation is slowing, Fed officials were still quite concerned about inflation at last month's meeting.

The following are clips from the minutes released today:

"...In their discussion of the economic situation and outlook, meeting participants noted that their assessments of the medium-term prospects for economic growth and inflation were little changed from the previous meeting..."

"...In their discussion of the major sectors of the economy, participants noted that developments in the housing market continued to weigh heavily on economic activity. Housing starts and permits for new construction had dropped sharply in October, and contacts in the building sector reported that construction firms were continuing to cancel options on land purchases. However, there were some indications that home sales might be starting to stabilize, aided by a marked slowing in the rate of increase of house prices and a decline in mortgage rates in recent months. Several participants also noted that a range of non-price incentives and concessions were being offered by construction firms to bolster sales. But even if home purchases had begun to level off, residential investment was likely to fall further in coming quarters as homebuilders sought to reduce their backlogs of unsold homes..."

"...All meeting participants remained concerned about the outlook for inflation. Although readings on core inflation had improved modestly since the spring, nearly all participants viewed core inflation as uncomfortably high and stressed the importance of further moderation. Participants expected core inflation to edge lower over time, in part as the pass-through of higher prices for energy and other commodities ran its course and as the moderate growth in aggregate demand likely led to a modest easing of pressures on resources. Some participants also highlighted the impact that movements in the prices of individual components of the price index, such as owners' equivalent rent and medical costs, could have on near-term readings on core inflation. More generally, participants stressed there was considerable uncertainty as to the probable pace and extent of the moderation in core inflation and that the risks around this desired downward path remained to the upside. Moreover, participants expressed concern that a failure of inflation to moderate as expected could entail significant costs if an upward drift in inflation expectations ensued..."

"... The outlook for economic growth and inflation was thought to have changed relatively little since the previous meeting..."

The Latest Odds

Of course, investors reacted to this week's housing news. As of right now, the folks who trade in Federal Funds Futures have odds at around 16% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will opt to lower the benchmark Federal Funds Target Rate by 25 basis points at the March 21^ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

• In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31^ST FOMC monetary policy meeting.
  
  
• Current odds that the Prime Rate will be cut to 8.00% at the
  March 21^ST, 2007 FOMC monetary policy meeting: 16% (unlikely)
  
  
• 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 to this blog for the latest odds. Odds may experience a significant shift on the release of the following economic report:

• Friday, January 5, 2007: The Labor Department releases the Employment Situation report for December, 2006.

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