Prime Rate

Futures Market 100% Certain U.S. Prime Rate Will Remain At 3.25% After The August 10 FOMC Monetary Policy Meeting

2010-07-21T15:13:00.025-04:00

President Obama singed the Wall Street Reform and Consumer Protection Act into law today; the title of this law says it all.

The new law is sweeping, and it took a lot of Congressional dealmaking to get it passed. But there's still much more to come, for soon regulators will need to craft new rules, and, of course, lobbyists will try their best to get these new rules written in a way that favors their clients.

The White House released a top ten list of items the American people should know about in the new law. Here it is:

Stronger protections for consumers against unfair credit card practices like rate hikes for existing credit card balances.

Mortgage brokers will be prohibited from making higher commissions by selling mortgages they know consumers can’t afford.

Free annual credit scores so people can stay on top of their finances. [Clarification: free credit scores are available if you receive worse terms on a loan because of something on your credit report, or if you are rejected.]

No more taxpayer-funded bailouts. If a company can’t make it, it will have to liquidate.

Greater input by company shareholders over how much a CEO gets paid. And companies’ compensation boards are now required to be truly independent.

Brokers who offer investment advice will have to act in the best interests of their customers, not their own financial interests.

Financial firms won't be allowed to grow so large that if one fails, it will affect the entire financial system.

There will be one agency whose sole job is to make sure that consumers get the protections they deserve and to set clear rules to hold banks, mortgage companies, payday lenders, and credit card lenders accountable.

Businesses can't be charged extra fees for debit card “swipe fees” that exceed the cost of processing transactions.

You can learn plenty more here at WhiteHouse,gov or at financialstability.gov

There's also a cool video here.

Here's what Fed boss Ben Bernanke had to say about it:

"...The financial reform legislation approved by the Congress today represents a welcome and far-reaching step toward preventing a replay of the recent financial crisis. It strengthens the consolidated supervision of systemically important financial institutions, gives the government an important additional tool to safely wind down failing financial firms, creates an interagency council to detect and deter emerging threats to the financial system, and enhances the transparency of the Federal Reserve while preserving the political independence that is crucial to monetary policymaking. Even before passage of reform legislation, the Federal Reserve has been overhauling its supervision and regulation of banking organizations and working to strengthen financial market infrastructures and practices. We will be focused and diligent in carrying out our responsibilities under the new law..."

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 leave the benchmark target range for the Federal Funds Rate at its current level at the August 10^TH monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the August 10^TH, 2010 FOMC monetary policy meeting is adjourned: 100% (certain)
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.

Fourth FOMC Meeting of 2010 Adjourned: U.S. Prime Rate Remains At 3.25%

2010-06-23T14:40:00.002-04:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its fourth monetary policy meeting of 2010 and, in accordance with our most recent forecast, has voted to leave short-term interest rates at their current levels. Therefore, the benchmark target range for the federal funds rate will remain at 0% - 0.25%, and the Wall Street Journal® Prime Rate (also known as the U.S., national or Fed Prime Rate) will remain unchanged at the current 3.25%.

Here's a clip from today's FOMC press release (note the text in bold):

"... Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.

Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly..."

Futures Market 100% Certain U.S. Prime Rate Will Remain At 3.25% After The June 23 FOMC Monetary Policy Meeting

2010-06-11T15:56:00.029-04:00

Looks like Wall Street is loosing faith that the American economy can pull off a sustained and lasting recovery.

Earlier today, stocks reacted negatively to news that retail sales fell by 1.2% last month. Wall Street economists were expecting a rise of 0.2%.

Moreover, Wall Street money, which was starting to make it's way back to stocks and other relatively risky investments, now seems to be turning back to the safety of government debt. The yield on the 3-month US Treasury Bill fell to 0.07% moments ago. It was as high as 0.17% as recently as May 19 of this year.

The yield on the benchmark 10-year Treasury Note fell to 3.22% today. It was 3.90% as recently as April 8 of this year.

New York Spot Gold is currently trading at $1,226.50 per ounce. Yikes! It was $938.30 per ounce about a year ago (June 12, 2009.)

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 leave the benchmark target range for the Federal Funds Rate at its current level at the June 23^RD, 2010 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the June 23^RD, 2010 FOMC monetary policy meeting is adjourned: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market 98% Certain U.S. Prime Rate Will Remain At 3.25% After The June 23 FOMC Monetary Policy Meeting

2010-06-02T14:24:00.062-04:00

Canada Raises Rates

Yesterday, Canada's central bank -- the Bank of Canada -- raised its key, short term interest rate by 25 basis points (0.25 percentage point.) Canada is the first G-7 nation to raise short-term rates since the banking crisis and subsequent Great Recession prompted central banks around the world to cut rates to record-low levels. The move by the Bank of Canada also ends the game of chicken that's been going on between the world's most powerful economies.

Included in the G-7: The United States, Japan, Germany, France, the United Kingdom, Italy and Canada.

Australia's central bank -- The Reserve Bank of Australia (RBA) -- began a cycle of rate hikes back on October of 2009.

US Manufacturing Continues to Expand

Also from yesterday: the Institute for Supply Management reported that its Purchasing Manager's Index (PMI) declined from 60.4 for April to 59.7% for May. A decline may seem negative but this is actually positive news. That's because for the PMI, any figure above 50% suggests that, in general, the American manufacturing sector is expanding, while any figure below 50% suggests contraction.

According to the PMI, American manufacturing has been in expansion mode since August of 2009. The PMI hit rock bottom during the height of the global banking crisis: it was 32.5% during December of 2008. Not quite a record low, but close. It was 30.3% during June of 1980.

Again from yesterday, the Commerce Department reported that construction spending rose by 2.7% last month. For a better perspective on how well the American construction sector is doing, however, best to have a glance at this chart:

Yep.

The above charts: courtesy Econoday.

Of course, futures markets reacted to the above news. As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 98% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the June 23^RD, 2010 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the June 23^RD, 2010 FOMC monetary policy meeting is adjourned: 98% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market 90% Certain U.S. Prime Rate Will Remain At 3.25% After The June 23 FOMC Monetary Policy Meeting

2010-05-07T12:33:00.058-04:00

Which unemployment rate should we pay attention to? U-3 or U-6? U-3 is the headline or official unemployment rate, the one you hear when listening to business news. The Labor Department defines U-3 as:

"Total unemployed, as a percent of the civilian labor force"

Whereas U-6 is defined as:

"Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force"

U-3 is the headline, because it paints a rosier picture than the reality of the employment situation in the U.S. But why would you not take into account Americans who are unemployed, who need an income and who have given up looking for work? Makes no sense.

Here's how I see it. If you need an income, you're unemployed. If you have a job and don't have health insurance, you're unemployed. If you're working yet can't meet your most urgent financial obligations, like paying child support and your mortgage, then you're unemployed. That's why U-6 is the only gauge that matters.

Today the nation learned that the official unemployment rate (U-3) in the U.S. jumped from the January through March rate of 9.7% to 9.9% for April. The Labor Department put a positive spin on this by noting that the higher jobless figure was due to previously discouraged American workers getting off the couch and starting to look for work again. U-6 stood at 17.1% for April.

During April, American companies added 290,000 new jobs to their non-farm payrolls, while the new jobs figure for February and March were revised up to a total of 120,000.

It's been a while since we've seen the future market less than 100% certain that the Fed will keep short-term rates (including the U.S. Prime Rate) where they are, but it's still a safe bet that the Fed will remain on the sidelines for at least one more FOMC monetary policy meeting.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 90% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the June 23^RD, 2010 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the June 23^RD, 2010 FOMC monetary policy meeting is adjourned: 90% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Appealing Your Property Tax Bill

2010-05-05T18:35:00.004-04:00

A tour around a typical American neighborhood reveals more “For Sale” signs than ever before. Reports further indicate that foreclosures will crest during the second half of 2010. And even more people now have mortgage loans that are actually higher than the home’s value. All this sums up to one hard fact: in most parts of the US property values are steadily decreasing.

Unfortunately, your annual property tax bill does not necessarily reflect this fact. Have you taken a close look at your assessment lately? If not, it certainly is time that you did just that. Many jurisdictions automatically increase property tax assessments by as much as 10% each and every year, regardless of property values.

Because most people with mortgages have their property tax bills escrowed they pay little attention to how much the mortgage carrier pays on their behalf. Don’t let this stop you from scrutinizing your property tax bill and moving forward with an appeal. Should the tax assessor rule in your favor, you will likely see reduced mortgage payments in the coming year, which is money in your pocket.

While doing some research is not required to state your appeal case to the local tax assessor, it certainly does not hurt. First, take a long look at your bill. It should list the “Fair Cash Value” of your home. If this number seems off the mark, contact the Assessors Office and ask for a detailed assessment of your property. Perhaps they have you listed as a 2-story when your home is a ranch, or they list an attached garage when yours is detached. You may also want to invest approximately $250-$400 and get an appraisal of your property. If you spend this small sum of money in order to get your property tax bill reduced by $1,000 or more it will certainly be money well spent. Further, if you have recently gotten refinanced or signed on for a home equity loan an appraisal would have already been done. Compare that paperwork against your property tax bill Fair Market Value to make certain it is within a fairly close range.

Next, make certain that if you occupy the home in question that the Homestead Exemption is taken into account. If you are a senior citizen, be sure that there is also a senior exemption.

Now that you have determined that your bill is too high, contact your tax assessor either by telephone or email. Explain to them that you would like to appeal your bill and ask them what process needs to be followed. In most cases there is a short form that needs to be completed and sent back to their offices. There should be no need to hire a real estate attorney or other professional to completely this process. In one afternoon and with very little effort you can see a huge return!

Astute property owner Jon Soderstrom of suburban Chicago has made it a policy for the past fifteen years to examine his assessment and appeal any undue increases. As Mr. Soderstrom noted, “I just told them there was no increase in property value therefore no increase in taxes was justified”. He went on to proudly announce that he has never lost an appeal.

Third FOMC Meeting of 2010 Adjourned: U.S. Prime Rate Remains At 3.25%

2010-04-28T14:17:00.009-04:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its third monetary policy meeting of 2010 and, in accordance with our most recent forecast, has voted to leave short-term interest rates at their current levels. Therefore, the benchmark target range for the federal funds rate will remain at 0% - 0.25%, and the Wall Street Journal® Prime Rate (also known as the U.S., national or Fed Prime Rate) will remain unchanged at the current 3.25%.

Here's a clip from today's FOMC press release (note the text in bold):

"...Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly..."

Futures Market 100% Certain U.S. Prime Rate Will Hold At 3.25% After The April 28 FOMC Monetary Policy Meeting

2010-03-30T23:02:00.002-04:00

For certain, Americans are starting feel prosperous again.

Yesterday, the Commerce Department reported that consumer spending increased by 0.3% last month, the fifth-straight month in positive territory. Today, the Conference Board reported that its Consumer Confidence Index (CCI) rose from 46.0 for February to 52.5 for this month.

I found the above news disconcerting, considering that this Great Recession is far from over, housing wealth is still very far from a rebound and the new "normal" U.S. unemployment rate is probably going to be around 8%. The economy is still anemic, yet Americans are once again raiding their savings accounts to spend like the worst of the downturn is behind us.

The Fed is going to cease spending good American cash on worthless mortgage-backed securities (MBS) tomorrow (Wednesday.) That, in turn, will likely cause mortgage rates to rise steadily over time. Not good news for the beleaguered housing market.

Seems that more Americans need to study economics. With the passage of healthcare reform, the national debt will soar to levels which will surely reduce our standard of living, in the long run. The interest the we pay to Japan, China and our other unnumbered creditors will almost certainly rise, which will in turn cause American prosperity to decline. The current debt problems of Greece: that's America within the next decade.

Pay attention to American defense spending over the next ten years. IMHO, It's going to rise significantly, not because of the specter of terrorism or the threat of Chinese military might. No, it will be because those who run the country want to be sure that we as a people can default on our sovereign debt, and still have a military so powerful that no nation would dare confront us over our massive bar tab.

With the DJIA almost back to the 11,000 mark again, it's no wonder that Americans are feeling optimistic about their financial circumstances. So I guess it's time for a reality check, in the form of a bear-market update.

Since closing with record highs on October 9, 2007, the DJIA has now lost 3,257.11 points (22.995%), while the broader S&P 500 Index has shed 391.88 points (25.038%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15. Earlier today, the DJIA closed at 10,907.42, which is just about where is settled on June 7, 1999 (10,909.38).

Earnings season is just around the corner, and expectations are high. According to Thomson Reuters, companies in the S&P 500 Index are projected to report earnings growth of 36%, with revenue growth expanding by 10%. If the prognosticators got it right, we may see the DJIA reaching for 12,000 by Xmas 2010.

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 leave the benchmark target range for the Federal Funds Rate at its current level at the April 28^TH, 2010 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the April 28^TH, 2010 FOMC monetary policy meeting is adjourned: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Second FOMC Meeting of 2010 Adjourned: U.S. Prime Rate Remains At 3.25%

2010-03-16T14:57:00.010-04:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its second monetary policy meeting of 2010 and, in accordance with our most recent forecast, has voted to leave short-term interest rates at their current levels. Therefore, the benchmark target range for the federal funds rate will remain at 0% - 0.25%, and the Wall Street Journal® Prime Rate (also known as the U.S., national or Fed Prime Rate) will remain unchanged at the current 3.25%.

Here's a clip from today's FOMC press release (note the text in bold):

"...Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability..."

Futures Market 100% Certain U.S. Prime Rate Will Hold At 3.25% After The March 16 FOMC Monetary Policy Meeting

2010-02-25T15:01:00.023-05:00

Yesterday, in testimony before the U.S. House of Representatives Committee on Financial Service, Fed Boss Ben Bernanke made it pretty clear that short-term rates, including the U.S. Prime Rate, won't rise any time soon. Here's a clip from Dr. Bernanke's prepared remarks:

"...Over the past year, the Federal Reserve has employed a wide array of tools to promote economic recovery and preserve price stability. The target for the federal funds rate has been maintained at a historically low range of 0 to 1/4 percent since December 2008. The FOMC continues to anticipate that economic conditions--including low rates of resource utilization, subdued inflation trends, and stable inflation expectations--are likely to warrant exceptionally low levels of the federal funds rate for an extended period..."

NB: It's widely accepted that "an extended period" means 3-4 Federal Open Market Committee (FOMC) monetary policy meetings, or about 6 months.

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 leave the benchmark target range for the Federal Funds Rate at its current level at the March 16^TH, 2010 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the March 16^TH, 2010 FOMC monetary policy meeting is adjourned: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Fed Raises The Discount Rate by 25 Basis Points

2010-02-18T21:08:00.021-05:00

Earlier today, the Federal Open Market Committee (FOMC) of the Federal Reserve elected to raise the primary credit rate, also known as the discount rate, by 25 basis points (0.25 percentage point) from 0.5% to 0.75%. This action does not affect the U.S. Prime Rate, so the U.S. Prime Rate remains at 3.25%. The primary credit rate is the rate at which healthy banks can borrow funds directly from the Fed.

Here's are a couple of clips from today's FOMC press release:

"...The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19..."

"...Easing the terms of primary credit was one of the Federal Reserve's first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC's target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days. On December 12, 2007, the Federal Reserve created the TAF to further improve the access of depository institutions to term funding. On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point and extended the maximum maturity of primary credit loans to 90 days.

Subsequently, in response to improving conditions in wholesale funding markets, on June 25, 2009, the Federal Reserve initiated a gradual reduction in TAF auction sizes. As announced on November 17, 2009, and implemented on January 14, 2010, the Federal Reserve began the process of normalizing the terms on primary credit by reducing the typical maximum maturity to 28 days.

The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC's 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve's primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread..."

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 leave the benchmark target range for the Federal Funds Rate at its current level at the March 16^TH, 2010 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the March 16^TH, 2010 FOMC monetary policy meeting is adjourned: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

First FOMC Meeting of 2010 Adjourned: U.S. Prime Rate Holds At 3.25%

2010-01-27T14:49:00.009-05:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its first monetary policy meeting of 2010 and, in accordance with our most recent forecast, has voted to leave short-term interest rates at their current levels. Therefore, the benchmark target range for the federal funds rate will remain at 0% - 0.25%, and the Wall Street Journal® Prime Rate (also known as the U.S., national or Fed Prime Rate) will remain unchanged at the current 3.25%.

Here's a clip from today's FOMC press release:

"...Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit will be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted..."

Futures Market 100% Certain U.S. Prime Rate Will Hold At 3.25% After The January 27 FOMC Monetary Policy Meeting

2010-01-06T15:44:00.000-05:00

I'm not a Christmas person, mainly because of the "consumerism on steroids" aspect of the tradition. However, I do like Christmas music, Christmas cheer and a certain movie that always comes on around Christmas time. No, I'm not talking about the Dickens favorite A Christmas Carol -- though I hold the story in high regard. No, my favorite Christmas movie is It's A Wonderful Life. If someone was to say to me that the 1946 Frank Capra classic is a mediocre or bad movie, I know I'd be talking to either a) a liar or b) someone who needs to see a psychiatrist. I watched it on NBC last month, and, even though I've seen it a few times before, the film still managed to give me a...well, let's call it a sore throat. It's a uniquely American story, and American filmmaking at it's finest.

The movie had a special significance at the end of 2009. The Mr. Potters of the world pocketing massive bonuses while suckling at the teat of the American taxpayer, as unnumbered small business owners struggle for survival.

So when I found a new website with a mission of getting Americans to ditch the big banks and move their money to community-focused financial institutions, I wasn't surprised that the site's creators used clips from It's A Wonderful Life to make the best possible case for "moving your money." I'm am very happy to be able to share this YouTube clip here at the Prime Rate blog:

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 leave the benchmark target range for the Federal Funds Rate at its current level at the January 27^TH, 2010 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the January 27^TH, 2010 FOMC monetary policy meeting is adjourned: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Eighth and Last FOMC Meeting of 2009 Adjourned: U.S. Prime Rate Holds At 3.25%

2009-12-16T14:25:00.003-05:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its eighth and last monetary policy meeting of 2009 and, in accordance with our most recent forecast, has voted to leave short-term interest rates at their current levels. Therefore, the benchmark target range for the federal funds rate will remain at 0% - 0.25%, and the Wall Street Journal® Prime Rate (also known as the U.S., national or Fed Prime Rate) will remain unchanged at the current 3.25%.

Here's a clip from today's FOMC press release:

"...Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen..."

Futures Market 100% Certain U.S. Prime Rate Will Hold At 3.25% After The December 15 FOMC Monetary Policy Meeting

2009-11-30T14:28:00.020-05:00

Some very interesting charts and projections to share today, courtesy of the Congressional Budget Office (CBO).

If you've been wondering when the Fed is going to start a cycle of raising short-term interest rates, the one macroeconomic figure you need to pay attention to is the unemployment rate. That's because the Bernanke Fed is confident that the nation's jobless rate is going to remain stubbornly high well into 2010 and likely beyond, which in turn will serve as a check on inflation. The Fed is still focused on pumping as much stimulus into the economy as it possibly can, to get the economy back to durable growth as soon as possible. It doesn't want to choke off an economic recover by raising short-term rates too soon, but it also doesn't want to keep rates too low for too long, and spark and raging inflation problem down the road. But here's the bottom line: the Fed believes that high unemployment together with continued housing market woes will act as a powerful economic sedative, keeping both consumer and wholesale prices under control.

Many investors are worried that the Fed is going to have an economic growth bias for too long, and that it will tolerate some inflation in exchange for growth. Just look at the price of gold as one piece of evidence: New York Spot was at $816.30 on November 28, 2008, and closed at $1,176.70 a few days ago (on November 27, 2009.)

Many are also worried about the current state of the dollar, but I'm not. The dollar is cyclical. It's been very low before, and has bounced back every time. When the economy returns to sustainable growth and the Fed back off from being the dominant force in the economy, the dollar will strengthen again, as simple as that.

So, does the Fed have it right about weak employment keeping inflation in check? I think so. With so many Americans out of work, or struggling with reduced hours, or forced to work part-time, consumer spending will be weak for some time. Exacerbating the jobs problem: too many homeowners are upside down with their mortgage; if they sell they lose big, and there's no home equity to tap into, the same home equity which supported strong consumer spending before the housing bust.

The above economic woes are acting as a strong disinflationary force in the economy, and will continue doing so for years -- yes, years.

Check out this chart of job losers vs. permanent layoffs:

The gray areas indicate economic recessions. As a percentage of unemployed persons, you can see that permanent layoffs are the highest they've been since the 1960's. Very telling of how bad this recession is compared to previous recessions.

And now, let's have a look at the CBO's inflation projection:

According to the chart, disinflation, not inflation, will dominate over the next few years, with prices normalizing after 2015.

So don't be surprised if the Fed keeps short-term rates -- including the U.S. Prime Rate -- at superlow levels throughout 2010.

Of course, for the latest and most accurate rate forecast, stay tuned to this blog.

Housing Market News: Some Good, Some Bad

OK, first the bad. The Mortgage Bankers Association (MBA) recently reported that mortgage delinquencies have set a new record high. Here's a clip from the MBA press release:

"...The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.64 percent of all loans outstanding as of the end of the third quarter of 2009, up 40 basis points from the second quarter of 2009, and up 265 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The non-seasonally adjusted delinquency rate increased 108 basis points from 8.86 percent in the second quarter of 2009 to 9.94 percent this quarter...The delinquency rate breaks the record set last quarter. The records are based on MBA data dating back to 1972..."

And now the good: sales of both existing (preowned) and newly built homes improved during October 2009, thanks in no small part to Uncle Sammy's $8,000, first-time homebuyer tax credit (there's also a tax credit of up to $6,500 available for longtime homeowners who purchase a replacement home.) That's good news for the housing market in general, but there's more: the credit has been extended. For more, check out this IRS page.

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 leave the benchmark target range for the Federal Funds Rate at its current level at the December 15^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the December 15^TH, 2009 FOMC monetary policy meeting is adjourned: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Seventh FOMC Meeting of 2009 Adjourned: U.S. Prime Rate Holds At 3.25%

2009-11-04T14:47:00.006-05:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its seventh monetary policy meeting of 2009 and, in accordance with our most recent forecast, has voted to leave short-term interest rates at their current levels. Therefore, the benchmark target range for the federal funds rate will remain at 0% - 0.25%, and the Wall Street Journal® Prime Rate (also known as the U.S., national or Fed Prime Rate) will remain unchanged at the current 3.25%.

Here's a clip from today's FOMC press release:

"...Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen..."

Futures Market 100% Certain U.S. Prime Rate Will Hold At 3.25% After The November 4 FOMC Monetary Policy Meeting

2009-10-29T19:35:00.032-04:00

The Federal Depositors Insurance Corporation (FDIC) recently updated its list of failed banks. So far this year, 106 banks have failed, and it's a very safe bet that there will be more failures before the year is out.

Crossing the 100 mark is a significant event, but it should also be put into perspective. Back in 1989, when the Savings and Loan crisis was in full swing, 534 financial institutions failed. FDIC boss Sheila Bair made sure to remind us of this in a recent YouTube clip:

If you have $250,000 or less on deposit at your bank, then you have nothing to worry about. If you have more than $250K on deposit, then you may want to check out a useful tool the FDIC has on its website. It's the Electronic Deposit Insurance Estimator (EDIE), and you can use it too see if all your money is covered. You can find EDIE here.

There are some easy options for those who need to get around the $250K insured limit, like opening deposit accounts at different banks, or using the Certificate of Deposit Account Registry Service® (CDARS).

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 leave the benchmark target range for the Federal Funds Rate at its current level at the November 4^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the November 4^TH, 2009 FOMC monetary policy meeting is adjourned: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market 98% Certain U.S. Prime Rate Will Hold At 3.25% After The November 4 FOMC Monetary Policy Meeting

2009-10-06T02:51:00.047-04:00

The Reserve Bank of Australia (RBA), Australia's central bank, has just raised the target for its cash rate by 25 basis points (0.25 percentage point), from 3.00% to 3.25%. Today's news is significant because Australia is the first G20 nation to raise its cardinal short-term interest rate since central banks around the world cut rates aggressively to counter the effects of the global credit crisis. Australia, which is the 14^TH largest economy in the world, last made a move on rates back in April of this year, when the RBA cut the target for it's key rate by 25 basis points.

Australia has weathered the global recession and financial crisis relatively well. The Australian economy grew by 0.6% during Q2 2009, while the United States declined by 0.7% during the same period.

Most economists are forecasting that the Fed will leave rates at record-low levels into 2010. When the Fed does decide to boost short-term rates, the Federal Open Market Committee (FOMC) is very likely to do so aggressively, as there's already an extraordinary amount of cash in the system that will need to be reined in. The Fed is very much aware of the risk of sparking another Great Inflation like the one the U.S. experienced during the 1970's. In the early 80's, Former Fed boss Paul Volcker was forced to raise rates to very high levels to bring inflation under control. The main byproduct of those high rates was a recession.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 98% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the November 4^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the November 4^TH, 2009 FOMC monetary policy meeting is adjourned: 98% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Sixth FOMC Meeting of 2009 Adjourned: U.S. Prime Rate Is Unchanged At 3.25%

2009-09-23T15:33:00.007-04:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its sixth monetary policy meeting of 2009 and, in accordance with our most recent forecast, has voted to leave short-term interest rates at their current levels. Therefore, the benchmark target range for the federal funds rate will remain at 0% - 0.25%, and the Wall Street Journal® Prime Rate (also known as the U.S., national or Fed Prime Rate) will remain unchanged at the current 3.25%.

Here's a clip from today's FOMC press release:

"...Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen..."

Futures Market 100% Certain U.S. Prime Rate Will Hold At 3.25% After Tomorrow's Monetary Policy Meeting

2009-09-22T12:11:00.001-04:00

The Federal Open market Committee (FOMC) decided to release its decision on short-term rates tomorrow as opposed to today, but it's still an extremely safe bet that the group will vote to leave rates alone. That means the U.S. Prime Rate will remain at 3.25% after tomorrow's afternoon's announcement.

Since the employment picture is still bleak and the overall economy still needs time to return to prosperity, most rate watchers expect the Fed to keep short-rates at current levels into Q1 2010.

The fact the Fed will keep rates on hold tomorrow will come as a surprise to no one, but economists will pay particular attention to the FOMC statement which will accompany tomorrow's press release on rates. It will be interesting to see if the Fed plans on changing its stance on buying mortgage-backed securities and U.S. Treasuries, since pulling back on these programs could have serious consequences for the U.S. housing market. It will also be interesting to see if any FOMC members break from consensus and vote instead for an increase for short-term rates, a development that could portend an end to ultra-low interest rates sooner than most economists are currently predicting.

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 leave the benchmark target range for the Federal Funds Rate at its current level at tomorrow's monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after tomorrow's monetary policy meeting is adjourned: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market 100% Certain U.S. Prime Rate Will Hold At 3.25% After The September 22 Monetary Policy Meeting

2009-08-25T10:20:00.043-04:00

President Obama has just announced that he is going to reappoint Ben Bernanke to another four-year term as chairman of America's central bank. Bernanke, a Republican, still has to get another stamp of approval from the United States Senate, but will likely be reconfirmed with little opposition. Bernanke has his critics, but many economists have praised the Fed chairman for his handling of the global financial crisis, crediting him for preventing a complete meltdown of the financial system, and for implementing innovative tools which the Fed has used to inject as much liquidity and confidence as possible into flagging financial markets.

I think it's safe to write that years from now, when the current recession is history, the vast majority of economists the world over will credit Bernanke with saving America from another devastating depression.

Here's a clip from President Obama's remarks made moments ago:

"...The man next to me, Ben Bernanke, has led the Fed through the one of the worst financial crises that this nation and this world have ever faced. As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another. But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve. And that is why I am re-appointing him to another term as Chairman of the Federal Reserve.

Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic freefall. Almost none of the decisions he or any of us made have been easy. The actions we have taken to stabilize our financial system, repair our credit markets, restructure our auto industry, and pass a recovery package have all been steps of necessity, not choice. They have faced plenty of critics, some of whom argued that we should stay the course or do nothing at all. But taken together, this 'bold, persistent experimentation' has brought our economy back from the brink. They are steps that are working. Our recovery plan has put tax cuts in people’s pockets, extended health care and unemployment insurance to those who have borne the brunt of this recession, and is continuing to save and create jobs that otherwise would have been lost. Our auto industry is showing signs of life. Business investment is showing signs of stabilizing. Our housing market and credit markets have been saved from collapse..."

Dr. Bernanke adding some comments as well. Clip:

"...It has been a particular privilege for me to serve with extraordinary colleagues throughout the Federal Reserve System. They have demonstrated remarkable resourcefulness, dedication, and stamina under trying conditions. Through the long nights and weekends and the time away from their families, they have never lost sight of the critical importance of the work of the Fed for the economic well-being of all Americans. I am deeply grateful for their efforts.

I especially want to thank my own family — my wife Anna and our children, Joel and Alyssa. Without their support and sacrifice I could not undertake this task.

The Federal Reserve, like other economic policy makers, has been challenged by the unprecedented events of the past few years. We have been bold or deliberate as circumstances demanded, but our objective remains constant: to restore a more stable economic and financial environment in which opportunity can again flourish, and in which Americans’ hard work and creativity can receive their proper rewards.

Mr. President, I commit today to you and to the American people that, if confirmed by the Senate, I will work to the utmost of my abilities — with my colleagues at the Federal Reserve and alongside the Congress and the Administration — to help provide a solid foundation for growth and prosperity in an environment of price stability..."

--

In other interest-rate news: Yesterday, the Bank of Israel, which serves as Israel's central bank, opted to raise its benchmark interest rate by 25 basis points (0.25 percentage point) from 0.5% to 0.75% for September 2009. A recent reading on inflation, in the form of the Israeli Consumer Price Index (CPI), show that prices are rising at a pace that would make any central banker nervous. For July, the CPI advanced by 1.1%, while economists were expecting a rise of about 0.85%.

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 leave the benchmark target range for the Federal Funds Rate at its current level at the September 22^ND, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the September 22^ND, 2009 FOMC monetary policy meeting is adjourned: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Fifth FOMC Meeting of 2009 Adjourned: Prime Rate Holds at 3.25%

2009-08-12T15:20:00.006-04:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its fifth monetary policy meeting of 2009 and, in accordance with our most recent forecast, has voted to leave short-term interest rates at their current levels. Therefore, the benchmark target range for the federal funds rate will remain at 0% - 0.25%, and the Wall Street Journal® Prime Rate (also known as the U.S., national or Fed Prime Rate) will remain at the current 3.25%.

Here's a clip from today's FOMC press release:

"...Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen..."

Futures Market 100% Certain U.S. Prime Rate Will Hold At 3.25% After Tomorrow's Monetary Policy Meeting

2009-08-11T09:09:00.022-04:00

Moments ago, the Labor Department released its preliminary report on productivity and unit labor costs for the second quarter of 2009. Nonfarm productivity advanced by 6.4%, while unit labor costs declined by 5.8%. Both figures were annualized and better than what the majority of Wall Street economists were expecting. As you might have guessed, the gains were attributed to reduced hours and layoffs.

Increased productivity and cheaper labor are great news for businesses, as the combo often translates to higher profits. It's great news on a macroeconomic level as well, as it means the Fed doesn't have to worry about elevated labor costs and lower productivity placing upward pressure on inflation. Bottom line: the news gives the Fed more room to leave short-term rates at near zero for as long as it takes to get the economy back on track.

Back in the 1990's, computers and the Internet helped businesses become more productive, so much so that the Fed was able to keep short-term rates steady while the economy continued to grow and the jobless rate remained low. Without the increase in productivity, the Fed probably would have had to raise short-term rates between 1996 and 1999, to contain the inflation that very likely would have taken hold.

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 leave the benchmark target range for the Federal Funds Rate at its current level at tomorrow's monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after tomorrow's FOMC monetary policy meeting is adjourned: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market 99% Certain U.S. Prime Rate Will Hold At 3.25% After The August 11 Monetary Policy Meeting

2009-07-22T14:25:00.043-04:00

On Friday, the Federal minimum wage will rise from $6.55 per hour to $7.25. The timing of this increase couldn't be worse, in my opinion, as small businesses across the country are already hurting in this deep recession. $0.70 might not seem like much, but for the small business owner who's barely making it -- the one who's already seriously worried about the future; the one who's having a real hard time finding financing; the one who's already been contemplating cutting his or her workforce -- it could mean the difference between keeping 400 employees working full time, or cutting back to 300. Moreover, the labor cost increase will likely prompt many employers to cut back on employee hours. This is no time to throw obstacles in the way of an economic recovery.

Will the increase help the economic recovery? I really don't think so. If you were making minimum wage right now, and all of a sudden you got an extra $39.20 in your pocket each week, would you spend it, knowing that, in this economy, your job could disappear in a flash? Is an extra $156.80 per month going to help that family who got an adjustable rate mortgage (ARM) during the boom -- you know, that mortgage that's about to reset and cause the monthly payment to jump from $1,200 per month to $1,900? Not likely. As a minimum-wage earner who's about to enjoy a slight pay increase, you might take your kids out to McDonald's a little more often, or you might do a little more shopping at the local Wal-Mart. But these two massive corporations are already weathering this recession well, and are likely to continue doing so. They don't need help making money. Small businesses do. America needs to focus on creating new jobs, and keeping small businesses healthy so that business owners keep their employees working.

As of the week that ended on July 4, 2009, there were 6,273,000 continuing claims for unemployment benefits, according to the Department of Labor. A staggering figure.

And then there's the inflation problem. When GDP eventually goes positive, all the money sloshing around in the economy is going to cause the pace of inflation to spike bigtime. A minimum wage increase will only exacerbate the inevitable problems we are going to face with price stability. Inflation will contribute to the dollar getting weaker, and foreign governments may lose faith in our currency.

Congress should postpone this year's minimum wage increase until next summer. The economy should be much improved by then. Moreover, twelve months from now, the billions of dollars of stimulus money that many important players have been waiting for will have had a chance to seep through federal, state and local bureaucracies. Once all that money gets into the hands of business owners, they'll create jobs, lots of jobs, and that should in turn stoke consumer spending.

According to Small Business Administration (SBA) estimates, small businesses account for 60% - 80% of new jobs.

I'm not advocating keeping the minimum wage where it is for the next 5 years. No way. However, I believe strongly that we should raise the minimum wage when we can afford to do so, i.e. when the threat of deflation is long gone and the economy is creating jobs again. The way I see it, increasing the minimum wage now makes it somewhat more likely that we will have to contend with that super ugly mix of stagnant economic growth with high inflation -- also known as stagflation -- which is bad for everybody.

So, just how bad is the current job market? The official national unemployment rate was 9.5% last month, and is widely expected to rise this month. I much prefer to look at the Labor Department's Alternative Measures Of Labor Underutilization table. Scroll down to row 5 and you'll see that the national unemployment rate was actually 10.8% in June, when discouraged and marginally attached workers were factored into the equation. I don't understand why Labor doesn't include these folks in the official rate that everyone, including the mass media, pays attention to, despite the fact that these people are clearly members of the unemployed in America. Here is how Labor defines discouraged and marginally attached workers:

"...Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job..."

I also like to look at the state-by-state numbers. The following are the state-by-state figures for June, sorted by the jobless rate in descending order:

Michigan: 15.2%
Rhode Island: 12.4%
Oregon: 12.2%
South Carolina: 12.1%
Nevada: 12%
California: 11.6%
Ohio: 11.1%
North Carolina: 11%
District Of Columbia: 10.9%
Kentucky: 10.9%
Tennessee: 10.8%
Indiana: 10.7%
Florida: 10.6%
Illinois: 10.3%
Alabama: 10.1%
Georgia: 10.1%
Missouri: 9.3%
Washington: 9.3%
New Jersey: 9.2%
West Virginia: 9.2%
Mississippi: 9%
Wisconsin: 9%
Arizona: 8.7%
New York: 8.7%
Massachusetts: 8.6%
Maine: 8.5%
Alaska: 8.4%
Delaware: 8.4%
Idaho: 8.4%
Minnesota: 8.4%
Pennsylvania: 8.3%
Connecticut: 8%
Colorado: 7.6%
Texas: 7.5%
Hawaii: 7.4%
Maryland: 7.3%
Arkansas: 7.2%
Virginia: 7.2%
Vermont: 7.1%
Kansas: 7%
Louisiana: 6.8%
New Hampshire: 6.8%
New Mexico: 6.8%
Montana: 6.4%
Oklahoma: 6.3%
Iowa: 6.2%
Wyoming: 5.9%
Utah: 5.7%
South Dakota: 5.1%
Nebraska: 5%
North Dakota: 4.2%

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 99% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the August 11^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the August 11^TH, 2009 FOMC monetary policy meeting is adjourned: 99% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market 98% Certain U.S. Prime Rate Will Hold At 3.25% After The August 11 Monetary Policy Meeting

2009-07-10T21:30:00.054-04:00

It's been a volatile week in equities markets, so we're going to mix this Prime Rate forecast with a bear market update.

Since closing with record highs on October 9, 2007, the DJIA has now lost 6,018.01 points (42.486%), while the S&P 500 Index has shed 686.02 points (43.831%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15.

Year-to-date, the DJIA is down 629.87 points (7.177%), while the S&P 500 is down 24.12 points (2.67%).

OK, so now for some positive bear-market news: since the bear-market low of March 6, 2009, the DJIA is up by 1,519.58 points (22.93%), while the S&P 500 is up by 195.75 points (28.644%).

There's also good news from an energy perspective: crude oil for future delivery closed at $59.89 per barrel in New York today. On July 11, 2008, crude closed at $145.08 per barrel. That's a year-over-year decline of $85.19 (58.719%). No one wants high energy prices to slow down an already drawn-out economic recovery, so most of the economic world is hoping that crude oil prices remain tame. However, lower oil prices also mean that global demand for energy is relatively weak, which could mean that a return to prosperity may be further down the road than many economists are currently predicting.
There was also some halfway decent news from the Labor Department yesterday. Though the unemployment rate for June 2009 was reported at 9.5% in a previously released Labor Department report -- and will likely rise this month -- new claims for unemployment benefits dipped below the 600K mark for the first time in countless weeks. For the week that ended on July 4, 2009, 565,000 Americans applied for jobless benefits. This news, however, was tempered by fact that continuing claims for jobless benefits surged by 159,000 to 6,883,000.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 98% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the August 11^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the August 11^TH, 2009 FOMC monetary policy meeting is adjourned: 98% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)