Probability of A Rate Cut for The September 18, 2007 FOMC Monetary Policy Meeting Now At 16%

A rate cut by the Fed at some point this year is now an even more remote possibility, thanks to an encouraging report on new home sales and escalating crude oil prices.

Housing Turnaround?

Though mortgages rates are still at historically low levels, subprime lending is on the decline, a fact that contributed to existing home sales falling by 2.6% last month. New home sales, on the other hand, jumped by a strong 16.2% in April. The new homes sales figure for April -- 981,000 -- was considerably higher than the 860,000 or so that Wall Street forecasters were expecting. Investors interpreted the new home sales numbers as a hint that the U.S. housing sector may be headed for a turnaround, maybe.

The Summer Driving Season is Upon Us

Placing upward inflationary pressure on the U.S. economy right now: rising crude oil prices. A barrel of crude oil for future delivery closed at $65.20 today; that's 5.28% higher than the closing price on May 4, 2007. $65 per barrel may seem high, but for some perspective, at this time last year -- May 26, 2006 -- crude oil finished the week at $71.29.

The Fed is still concerned about inflation, and the group won't cut short-term interest rates until the inflation threat is well-contained.


The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at around 16% (according to current pricing on contracts) that the FOMC will choose to lower the benchmark Federal Funds Target Rate by 25 basis points at the September 18^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 June 28^TH and August 7^TH FOMC monetary policy meetings.
  
  
• Current odds that the Prime Rate will be cut to 8.00% after the September 18^TH, 2007 FOMC monetary policy meeting: 16% (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 report:

• Friday, June 1, 2007: The Labor Department releases the May, 2007 Employment Situation report.

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Third FOMC Meeting of 2007 Adjourned: The Prime Rate Holds at 8.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its third 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 Fed 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.

Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters.

Core inflation remains 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 15% (according to current pricing on contracts) that the FOMC will choose to lower the benchmark Federal Funds Target Rate by 25 basis points at the August 7^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 June 28^TH, 2007 FOMC monetary policy meeting.
  
  
• Current odds that the Prime Rate will be cut to 8.00% after the August 7^TH, 2007 FOMC monetary policy meeting: 15% (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, May 11, 2007: The Labor Department releases the Producer Price Index (PPI) report for March, 2007.
  
  
• Tuesday, May 15, 2007: The Labor Department releases the Consumer Price Index (CPI) report for March, 2007.

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Probability of A Rate Cut for The August 7, 2007 FOMC Monetary Policy Meeting Now At 17%

The Federal Open Market Committee (FOMC) will convene the next monetary policy meeting next week (Wednesday, May 9, 2007) and it is a very safe bet that the Fed will opt to leave the benchmark Fed Funds Target Rate at 5.25%, which means that Prime Rate will remain at 8.25%.

The Fed is also very likely to leave interest rates at their current level after the June 28^TH monetary policy meeting.

As for the future beyond June of this year, the fed funds futures market -- the best predictor of where interest rates are headed -- is currently pricing in odds at near 100% that the Fed will lower rates by 25 basis points (0.25 percentage point) by the time the December 11^TH, 2007 monetary policy meeting is upon us (it's important to note that predictions based on the fed funds futures market are most accurate 45 days into the future, due to the numerous economic variables involved.)

Influencing the fed funds futures market this week were some encouraging reports on U.S. manufacturing and productivity, but the week ended on a somewhat down note with the Labor Department's release of the jobs figures for April. Economists were expecting the new payrolls figure to be at or around 100,000, but the U.S. economy added 88,000 jobs last month. Furthermore, the unemployment rate rose from 4.4% to 4.5%, and the new payrolls figures for both March and February were revised downward.


The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 17% (according to current pricing on contracts) that the FOMC will opt to lower the benchmark Federal Funds Target Rate by 25 basis points at the August 7^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 and June 28^TH, 2007 FOMC monetary policy meetings.
  
  
• Current odds that the Prime Rate will be cut to 8.00% after the August 7^TH, 2007 FOMC monetary policy meeting: 17% (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, May 11, 2007: The Labor Department releases the Producer Price Index (PPI) report for March, 2007.
  
  
• Tuesday, May 15, 2007: The Labor Department releases the Consumer Price Index (CPI) report for March, 2007.

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