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

The core personal consumption expenditures (PCE) price index -- The Fed's preferred inflation gauge -- rose by 2.4% over the last 12 months. The Fed would like to see inflation somewhere between 1% and 2%, so the latest inflation data make a rate cut for this year less likely. Bottom line: the Fed most likely won't even consider cutting short-term interest rates while inflation continues to hover above the 2% mark.

Placing additional inflation pressure on the U.S. economy: the price on a barrel of crude oil for future delivery ended the week up at $65.87.

Here's a clip from testimony made by Fed chief Ben Bernanke before Congress 2 days ago:

"...Core inflation, which is a better measure of the underlying inflation trend than overall inflation, seems likely to moderate gradually over time. Despite recent increases in the price of crude oil, energy prices are below last year’s peak. If energy prices remain near current levels, greater stability in the costs of producing non-energy goods and services will reduce pressure on core inflation over time. Of course, the prices of oil and other commodities are very difficult to predict, and they remain a source of considerable uncertainty in the inflation outlook..."

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 28% (according to current pricing on contracts) that the FOMC will elect 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 May 9^TH FOMC monetary policy meeting.
  
  
• Current odds that the Prime Rate will be cut to 8.00% after the June 28^TH, 2007 FOMC monetary policy meeting: 28% (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 report:

• Friday, April 6, 2007: The Labor Department releases the Employment Situation report for March, 2007.
  

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Second 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 their second monetary policy meeting of 2007, 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 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 been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments 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; 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 44% (according to current pricing on contracts) that the FOMC will elect 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 May 9^TH FOMC monetary policy meeting.
  
  
• Current odds that the Prime Rate will be cut to 8.00% after the June 28^TH, 2007 FOMC monetary policy meeting: 44% (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, March 23, 2007: The National Association of Realtors® releases the Existing Home Sales report for February, 2007.
  
  
• Monday, March 26, 2007: The Commerce Department releases the New Home Sales report for February, 2007.
  
  
• Thursday, March 29, 2007: The Commerce Department releases the final Gross Domestic Product report for Q4, 2006.

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FOMC Meets On Wednesday: No Action Expected

The numbers from two critical inflation gauges were released this past week: the Producer Price Index (PPI) and the Consumer Price Index (CPI). Both the February CPI and the February PPI were higher than Wall Street was expecting, which translates to an decreased likelihood that the Fed will lower short-term interest rates later this year.

February Industrial Production was also higher than forecasters were expecting, which gives the Fed another reason to be concerned about inflation.

Whether or not the Fed will lower interest rates later this year is still hard to predict at this point. As for next Wednesday's Fed meeting (March 21^ST), the vast majority of economists, academics and Wall Street forecasters agree that the Federal Open Market Committee (FOMC) will leave the Fed Funds Target Rate at 5.25%, which means the U.S. Prime Rate (WSJ Prime Rate) will remain unchanged at 8.25%.


The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 30% (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 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% after the June 28^TH, 2007 FOMC monetary policy meeting: 30% (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.

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Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 32%

Are we headed for a recession? Of course, we'll get one eventually. But will we get one within the next 12 months?

Well, according to a yield-curve model created by the Fed, there's a 50/50 chance that the U.S. economy will contract for two quarters. Furthermore, former Fed boss Alan Greenspan recently predicted a one-in-three chance that the U.S. economy will sink into recession at some point this year.

And the bad news from the subprime mortgage industry keeps coming: New Century Financial Corporation recently reported that the company isn't accepting new loan applications, because its creditors won't let it. Shares of New Century Financial Corporation (NEW), which were trading in the $50 range during mid-2006, closed at $3.22 per share today.

• The problem with the housing market is that it was strong for a number of years, thanks in no small part to very low interest rates. The hot housing market led to a rise in property values, which then prompted lenders to relax lending standards based on the reduced risk involved with home loans (higher home values = lender can recover more cash if the borrower defaults.) Now that home prices have been stagnant or falling in many regions across the country, lenders are now more stringent with their lending practices, which translates to fewer people qualifying for mortgages, which in turn contributes to the slowing housing market.
  
  Many home buyers who bought via an adjustable rate mortgage (ARM) assumed that home prices would continue to climb, which would make it easy to refinance once the loan resets ("resetting" is when the attractive, low-monthly-payments period -- also known as the "teaser" period -- ends, and the higher monthly payments begin.) Folks who opted for an ARM usually planned to either refinance before the loan reset, or sell the property before the loan reset. But if the value of a home doesn't rise significantly over time, then both selling and refinancing can be difficult due to lack of equity. Furthermore, if the borrower's credit score declines during the teaser period, then finding a good refinancing deal becomes much harder.
  

Ordinarily, news like the above would translate to an increased likelihood that the Fed will cut short-term interest rates later this year, but today's jobs report nullified the negative economic news, and led to a decreased likelihood that the Fed will lower rates before mid-2007.

According to the Labor Department's February Employment Situation Report, the unemployment rate dropped from 4.6% to 4.5%, and 97,000 new jobs were added to the American workforce. Furthermore, the January new jobs count was revised up from 111,000 to 146,000, and the December, 2006 figure was bumped up from 167,000 to 226,000.


The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 32% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by 25 basis points at the June 28^TH, 2007 monetary policy meeting (odds on a rate cut for June were at 75% a week ago.)


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut to 8.00% after the June 28^TH, 2007 FOMC monetary policy meeting: 32% (not likely)
  
  
• Current odds that the Prime Rate will be cut to 8.00% after the August 7^TH, 2007 FOMC monetary policy meeting: 79% (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 reports:

• Thursday, March 15, 2007: The Labor Department releases the Producer Price Index (PPI) report for February.
  
  
• Friday, March 16, 2007: The Labor Department releases the Consumer Price Index (CPI) report for February.

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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 28^TH, 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 28^TH 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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