Prime Rate

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)

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.

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)

Fourth FOMC Meeting of 2009 Adjourned: Prime Rate Remains at 3.25%

2009-06-24T14:58:00.007-04:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its fourth 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 April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be 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 will buy up to $300 billion of Treasury securities by autumn. 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 Prime Rate Will Hold At 3.25% After The June 24 FOMC Meeting

2009-06-05T19:45:00.004-04:00

Back in March of this year, the Fed began buying long-term U.S. Treasury securities with a two-fold objective: a) increased demand would produce lower yields, which would in turn cause the rates associated with 15- and 30-year fixed-rate mortgages to decline, and b) lower yields would also stem the flow of capital to the safety of government debt by souring the Treasury security milk (the government would rather have capital moving to riskier investments like stocks and corporate debt, which would be much better for the economy.)

For a while, it looked like the Fed got exactly what it wanted with regard to mortgage rates. According to the mortgage giant Freddie Mac, the average rate on a 30-year fixed-rate mortgage was 5.47% on December 11, 2008. The average rate dropped below 5% during the winter and spring of this year, declining to 4.78% twice during April.

But now rates may be starting to trend upward. Earlier today, Freddie announced that the average mortgage rate rose from 4.91% last week to 5.29% for the seven-day period that ended today.

So if you've been sitting on the fence waiting for mortgage rates to bottom out before diving into the housing game, you may want to consider jumping in now.

Then again, you may want to take your chances and bet that rates will head south again in the future. That's because the Fed plans to continue buying mortgage-backed securities during the rest of 2009, and long-term Treasury securities into the fall of this year, which will keep downward pressure on rates.

Why Did Mortgage Rates Spike?

The average mortgage rate jumped because investors reacted positively to the not-as-bad-as-expected May employment situation report released by the Labor Department Friday. Wall Street economists were expecting non-farm payrolls to decline by 530,000 last month, but the figure for May came in at 345,000. 345K is still a lots of pink slips, but it’s the softest monthly decline since September of 2008. Investors saw this as sign that an economic recovery may be in the offing, and moved enough capital from the safety of government debt to cause bond yields to spike. As demand for bonds wanes, the yields associated with bonds rises, and as long-term bond yields rise, so do the rates on 30-year FRM's.

Investors are also worried that excessive government spending, combined with the Fed's quantitative easing (a.k.a. printing money), will erode the value of the dollar; that inflation will surge at a pace the Federal Reserve won't be able to manage easily, when the U.S. economy returns to prosperity. Inflation and a weak dollar are both anathema to bond investors.

Here is how the yield on the benchmark 10-year Treasury Note looked over the past 16 days:

5 Jun 2009: 3.86%
4 Jun 2009: 3.72%
3 Jun 2009: 3.55%
2 Jun 2009: 3.64%
1 Jun 2009: 3.71%
29 May 2009: 3.46%
28 May 2009: 3.67%
27 May 2009: 3.69%
26 May 2009: 3.49%
22 May 2009: 3.45%
21 May 2009: 3.35%
20 May 2009: 3.20%
19 May 2009: 3.24%
18 May 2009: 3.21%
15 May 2009: 3.12%
14 May 2009: 3.11%

Recent economic news that managed to seduce the bull out of recession-weary investors may well have been the siren song of an economic false dawn. During the Great Depression, there were many instances where the economy looked like it was getting better, when in fact economic conditions were only to get worse.

Home values across much of the country probably won't improve in a significant way during 2009, so whether you choose to get a FRM now or wait a few months, you're probably going to get a deal that'll have you smiling for a while.

Here's an interesting calculation from the good folks at Bloomberg.com (referring to this week's rate spike that Freddie announced today) :

"...This week’s rate increase translates into an additional $31.79 a month for a buyer purchasing the median-priced U.S. home of $170,200 with a 20 percent down payment..."

For a weekly perspective on mortgage rates, stay tuned to this webpage.

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 24^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 June 24^TH, 2009 FOMC monetary policy meeting is adjourned: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

FOMC Meeting Schedule (Tentative) for 2010

2009-06-04T18:39:00.004-04:00

Earlier today, The Federal Open Market Committee (FOMC) released its tentative monetary policy meeting schedule for 2010. The FOMC doesn't always stick to the exact dates on the schedule (hence tentative), but they do always meet at least eight times per calendar year.

Why is this schedule important to you? Because it's at these monetary policy meetings that The FOMC votes on whether to raise, lower or make no changes to The Fed Funds Target Rate, and when the Fed Funds Target Rate changes, the U.S. Prime Rate (also known as the fed, national or WSJ Prime Rate) will also change.

Here's the tentative schedule for 2010:

January 26 - 27, 2010

March 16, 2010

April 27 - 28, 2010

June 22 - 23, 2010

August 10, 2010

September 21, 2010

November 2 - 3, 2010

December 14, 2010

Futures Market 97% Certain Prime Rate Will Hold At 3.25% After The June 24 FOMC Meeting

2009-05-14T20:40:00.009-04:00

A week ago, the Federal Reserve released the results of the Supervisory Capital Assessment Program (SCAP), commonly known as the U.S. bank stress test. The goal of the stress test was determine if America's biggest banks have enough capital to continue operating normally if the recession gets worse than economists are currently projecting. Nineteen of America's largest financial institutions were put to the test to see if they would be able to provide consumers and businesses with credit while concurrently contending with losses. The results are summarized in the following graphic:

Image courtesy: CBS News

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 97% (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 24^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 June 24^TH, 2009 FOMC monetary policy meeting is adjourned: 97% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Third FOMC Meeting of 2009 Adjourned: Prime Rate Remains at 3.25%

2009-04-29T14:39:00.001-04:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its third 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 the FOMC press release:

"...Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, 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.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

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 anticipates 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 will buy up to $300 billion of Treasury securities by autumn. 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 facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.

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..."

Second Lien Plan Will Help Homeowners Struggling with Second Mortgages

2009-04-28T19:29:00.003-04:00

The Obama administration has a new plan to help homeowners who are struggling to keep up with their second mortgages. It's called the Second Lien Program, and it will be active in about a month. Here's a clip from the Treasury Department website:

"...The Second Lien Program announced today will work in tandem with first lien modifications offered under the Home Affordable Modification Program to deliver a comprehensive affordability solution for struggling borrowers. Second mortgages can create significant challenges in helping borrowers avoid foreclosure, even when a first lien is modified. Up to 50 percent of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien. Under the Second Lien Program, when a Home Affordable Modification is initiated on a first lien, servicers participating in the Second Lien Program will automatically reduce payments on the associated second lien according to a pre-set protocol. Alternatively, servicers will have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by Treasury, allowing servicers to target principal extinguishment to the borrowers where extinguishment is most appropriate..."

And here's some more insight from a Bloomberg article:

"...Mortgage delinquencies increased to a seasonally adjusted 7.88 percent of all loans in the fourth quarter, the highest in records going back to 1972, according to figures from the Mortgage Bankers Association in Washington. Loans in foreclosure rose to 3.3 percent, up from 2.04 percent a year earlier.

Obama’s overall plan to reduce foreclosures by modifying mortgages targets as many as 4 million homeowners. As many as half of the participants in the mortgage-modification program may be eligible for the second-lien assistance, administration officials said.

Congressional Action

The administration also intends to urge action by Congress to make Hope for Homeowners easier to use and more accessible, the administration officials said. The program is primarily aimed at borrowers who are “underwater,” owing more on their mortgages than their homes are worth.

No other legislative changes are required for the administration’s revised housing plans to take effect, the officials said.

The new measures may ease mortgage investors’ concerns that the biggest banks and servicers would be tempted to rework too many loans under the program in order to bolster their home- equity portfolios, Laurie Goodman, an analyst at Amherst Securities Group LP in New York, said in a telephone interview.

“Certainly, it appears that the Treasury has listened to first-lien investors,” Goodman said. Today’s announcement “goes a very long way toward addressing their objections,” she said.

Second-Lien Program

The second-lien program should be up and running in about a month, the officials said. They estimated that about 75 percent of all U.S. mortgages are managed by servicers that already have agreed to participate in the government’s modification programs. Servicers are administrators in the relationship between lenders and borrowers.

The mortgage initiative offers subsidies to servicers and lenders, including bond investors, to help lower borrowers’ housing payments to 31 percent of their income. Because modifications are voluntary, the Treasury is offering incentive fees to encourage participation in the program.

The $12,000 in possible incentive fees has several components. Many of the fees are paid over time, as an incentive for borrowers and servicers to strike deals that will last.

When modifying first mortgages, servicers can receive $1,000 up front, and $1,000 per year for three years. If the mortgage being modified is eligible and not yet delinquent, they can also receive $500, for a maximum possible total of $4,500.

Reducing Principle

Then borrowers who make their new payments can get up to $1,000 per year for five years, up to a total of $5,000. This money is paid to the lender or investor who holds the first mortgage, and it reduces the borrower’s principle.

When a second mortgage is also modified, the servicer on that mortgage can get a $500 up-front fee, plus $250 per year for three years, for a maximum possible total of $1,250. The borrower also is eligible for an additional $250 per year for five years, again paid toward the principle on their primary mortgage..."

"...The Treasury announced today that second-mortgage holders will be given a subsidy to reduce the borrower’s interest rates to as low as 1 percent. Alternatively, the lien holder could receive as much as 12 cents on the dollar to retire the debt. There also are incentives in place for first-mortgage holders.

In the case of a sample borrower with a $250,000 interest- only first mortgage with a 6 percent rate, leading to housing expenses equal to 40 percent of the borrower’s income, the government may pay about $2,625 annually to help reduce those payments for five years, according to an Amherst Securities Group report in February.

If that borrower also had a $43,942 second mortgage with an 8.6 percent rate, the government may bear half of the $2,336 annual cost of reducing the payment for five years under the plan announced today, according to data released by the Treasury..."

Even more insight from a recent Associated Press article:

"...During the housing boom, lenders readily gave out "piggyback" second loans that allowed consumers to make small down payments or avoid them entirely. While home prices soared, such mortgages were even extended to borrowers with poor credit scores and people who didn't provide proof of their incomes or assets.

But those loans, which are attached to about half of all troubled mortgages, have been an obstacle to efforts to alleviate the housing crisis. That's because borrowers who are trying to get their primary mortgage modified at a lower monthly payment need the permission of the company holding the second mortgage.

The new plan aims to get rid of that roadblock, administration officials said. "We're offering even more opportunities for borrowers," Treasury Secretary Timothy Geithner said in a statement.

The new incentives are estimated to help up to 1.5 million borrowers with second mortgages, Housing Secretary Shaun Donovan said. While data on how many household have been helped by the Obama administration's housing plans are not available, Donovan told reporters there have been "hundreds of thousands of applications."

The administration's second mortgage initiative will be funded out of $50 billion in financial rescue money already allocated. As an incentive to modify second loans at lower interest rates, mortgage companies would get $500 upfront for each modified loan, plus $250 a year for three years as long as the borrower doesn't default.

Similarly, borrowers would get up to $1,000 over five years applied to the principal balance of their primary mortgage, and the government would pick up part of investors' costs as well. Lenders would also be given the ability to remove second mortgages entirely in exchange for larger government payouts.

The administration also plans to give mortgage companies $2,500 payments to entice them to participate in the "Hope for Homeowners" program. It was launched by the government last fall but has so far has been a failure, proving unattractive to banks required to absorb large losses.

It was supposed to allow 400,000 troubled homeowners to swap risky loans for traditional 30-year fixed-rate mortgages with lower rates. Instead only one loan has received final approval, with about 50 more in the works and fewer than 1,000 applications.

The program has been stymied by high fees, complex regulations and a requirement that banks absorb large losses. The Obama administration supports legislation in Congress to ease those restrictions.

Meanwhile, the faltering economy is causing the housing crisis to spread. Nationwide, nearly 804,000 homes received at least one foreclosure-related notice from January through March, up from about 650,000 in the same period a year earlier, according to RealtyTrac Inc., a foreclosure listing firm..."

Futures Market 100% Certain Prime Rate Will Hold At 3.25% After Wednesday's Fed Meeting

2009-04-27T16:21:00.042-04:00

The Fed's next decision on short-term interest rates will be on Wednesday, and the futures market is now 100% certain that the Federal Open Market Committee (FOMC) will vote to leave short-term rates at their current levels. This means the U.S. Prime Rate will remain at the current 3.25%.

Rate News from Canada: Overnight Rate Now 0.25%

Last Tuesday, the Bank of Canada, which is Canada's central bank, cut its benchmark overnight target interest rate from 0.5% to 0.25%, which in turn caused the Canadian Prime Rate to drop from 2.50% to 2.25%. Canada's overnight rate is now on par with the Fed's benchmark rate. 0.25% is a brand new record low for Canada's central bank (the bank was founded in 1934) and it's the lowest it can possibly go. Here's a clip from the press release issued last week:

"...In an environment of continued high uncertainty, the global recession has intensified and become more synchronous since the Bank's January Monetary Policy Report Update, with weaker-than-expected activity in all major economies. Deteriorating credit conditions have spread quickly through trade, financial, and confidence channels. While more aggressive monetary and fiscal policy actions are underway across the G20, measures to stabilize the global financial system have taken longer than expected to enact. As a result, the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0 per cent in 2009. The Bank now expects the recovery to be delayed until the fourth quarter and to be more gradual. The economy is projected to grow by 2.5 per cent in 2010 and 4.7 per cent in 2011, and to reach its production capacity in the third quarter of 2011. Given significant restructuring in a number of sectors, potential growth has been revised down. The recovery will be importantly supported by the Bank's accommodative monetary stance..."

In other economic news:

According to the latest Commerce Department report on new home sales, the cost of a brand new home at the end of last month was about the same as it was at the end of 2003. The latest figures were released last Friday, with the median price on a newly built home dropping from $208,700 during February to $201,400 during March. Click here for historical prices and a chart.
Preliminary existing home sales figures were released by the National Association of Realtors® last Thursday. The report indicated that the median price on a previously occupied home has increased since the start of 2009:

-- January: $164,800
-- February: $168,200
-- March: $175,200

Click here for historical prices and a chart.

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 29^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 April 29^TH, 2009 FOMC monetary policy meeting is adjourned: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market 97% Certain Prime Rate Will Hold At 3.25% After The April 29 Fed Meeting

2009-04-06T19:04:00.048-04:00

Last Friday, the Labor Department announced that American employers shed another 663,000 jobs last month, and that the unemployment rate rose from 8.1% for February to 8.5% for March. Employers have eliminated over 5 million jobs since the recession began at the end of 2007, and the total number of jobless people in the USA is now 13.2 million.

On Thursday, the Labor Department reported that there were 669,000 new claims from unemployment benefits during the week that ended on March 28, 2009. During the week that ended on March 21, there were 5,728,000 people collecting an unemployment check across the country.

In housing news, the latest S&P/Case-Shiller report on home prices was released last Tuesday. The following are some notable price declines for the January 2008 through January 2009 period:

San Francisco: -32.4%
San Diego: -24.9%
Phoenix: -35.0%
Miami: -29.4%
Los Angeles: -25.8%
Las Vegas: -32.5%
Detroit: -22.6%

Over the past 9 years, Detroit has fared the worst of all the major metropolitan areas. The home price index for Detroit came in at 77.56 for January 2009. The baseline score of 100.00 is associated with home prices during January 2000. So, the price of a typical, single-family home in Detroit was down 22.44% when comparing its price during January 2000 to its price during January 2009. Yikes! In contrast, and for some perspective, the index for the New York City metro area came in at 181.28, which indicates an increase of 81.28% for the same period.

Also from Tuesday, The Conference Board reported that its Consumer Confidence Index (CCI) was a very somber 26.0 during March 2009. For the CCI, the baseline 100.00 score is pegged to 1985 survey data.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 97% (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 29^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 April 29^TH, 2009 FOMC monetary policy meeting is adjourned: 97% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Homebuilders Offering Mortgage Rates Below 4 Percent

2009-04-02T13:46:00.013-04:00

Homebuilders like Lennar, Hovnanian Enterprises and Toll Brothers are offering qualified customers mortgage rates below 4% in an effort to generate sales. Here's a clip from a recent WSJ article:

"...As mortgage rates fall to near historic lows, some home builders are offering even lower interest rates, in an effort to lure buyers amid the slow spring selling season.

The latest sales promotion: Lennar Corp. is offering a fixed 3.625% rate over the life of a 30-year fixed rate mortgage. The deal is besting average rates that have fallen below 5% nationwide, but it comes as other builders are reporting mixed results from similar incentives.

Hovnanian Enterprises Inc.'s recent offer of a 3.99% rate sparked "underwhelming" interest from home buyers, says Dan Klinger, president of the builder's mortgage operation. "It wasn't like we needed crowd control," says Mr. Klinger.

Earlier this year, luxury builder Toll Brothers Inc. was offering a 3.99% interest rate in many of its developments nationwide, but today that rate is no longer available nationally. Toll executives have said that the promotion boosted traffic to its Web site, but the low rate alone hasn't been enough to break weak consumer confidence that is still weighing on the market.

Bargain mortgage rates are the latest sales strategy from builders struggling to sell homes. Mounting unemployment continues dogging the sector, because people without jobs, or those afraid of losing one, are unlikely to purchase, no matter how low the rate.

Since the downturn began, builders have tried everything from free tropical vacations to subsidized closing costs in order to move inventory. They then cut costs and even offered layaway plans for down payments.

For home buyers, the low mortgage rates from the builders represent significant savings. But be wary of the fine print: Lennar is offering the 30-year rate "on select homes," and the loan amount cannot exceed $417,000. The minimum credit score is 700, which is a relatively high score in the current environment. In addition, it could be hard for buyers to come up with the minimum 10% down payment that Lennar requires to qualify for the 3.625% rate.

The builders' low rates may help first-time home buyers, "but it's not going to goose the trade-up market," says Thomas Lawler, a housing economist. "That's because most trade-up buyers use the equity from their previous home for a down payment, and that equity often doesn't exist any more."

KB Home is one builder that isn't chasing buyers with low mortgage rates, for now. Instead, the Los Angeles builder is focusing on offering smaller houses that are competitively priced with foreclosed houses. The strategy seems to be helping KB, which reported on Friday that its sales improved more than some analysts expected..."

New Mortgage and Mortgage Refinance Tips for 2009

2009-03-28T12:19:00.000-04:00

On Wednesday, March 18, 2009, the Federal Open Market Committee (FOMC) of the Federal Reserve voted to keep short-term interest rates steady at near zero percent. In the press release issued that afternoon, the Fed also announced plans to buy up to $300 billion-worth of long-term Treasury securities from the Treasury Department, and purchase a whole lot more mortgage-backed securities from agencies like Fannie Mae and Freddie Mac. The primary goal of these Fed actions is to keep mortgage rates down and, so far, these specific tactics have been working. Since last week, the average interest rate associated with 30-year, fixed-rate mortgages has been moving lower and is expected to fall and stay below 5% in the near future. The prospect of lower mortgage rates has many homeowners thinking about refinancing their current home loans, and has lots of renters making plans to jump into the housing market. Here are some tips that both refinancers and new buyers should keep in mind:

Considering the staggering pace of price declines across the country, prospective homebuyers should try their best to get immediate equity. This is accomplished by negotiating a price for a home that's lower than the lender's appraised value of the home. If successful, the new homeowner gets to move into a home with immediate equity, a substantial plus in the current housing market.
First-time homebuyers who want to get the best possible home loan deal should have their financial house in perfect order before applying. Subprime lending is out and old-fashioned lending standards are back in. Prospective buyers should:
- be prepared to put at least 20% down,
- be ready to provide solid proof of income,
- improve their debt-to-income ratio by reducing or eliminating any credit card debt, and
- try their best to get their FICO credit score above 760.
Both new homebuyers and refinancers can get free access to the credit reports that lenders use by visiting AnnualCreditReport.com, a website created via Congressional mandate. A free report from each of the three consumer reporting agencies -- TransUnion, Experian and Equifax -- is available at no cost every 12 months. Check for errors; if mistakes are found, don't hesitate to dispute any and all inaccurate and derogatory items..
A new homebuyer who has a great credit score, strong, confirmable income and plenty of money to put down may be able to find a mortgage rate below 5%, as long as the loan isn't jumbo or superjumbo in size (a jumbo mortgage is a home loan above $417,000, while a superjumbo is more than $650,000.) While it's possible to find a rate below five percent on a jumbo mortgage, the odds are not good.

The same holds true for refinancers looking for a jumbo or superjumbo home loan refinance.
For both new buyers and refinancers, it's important to understand what a no-cost mortgage loan or a no-cost refinance loan really means. "No cost" does not mean that closing costs (also known as settlement costs) have been erased. It means that the closing costs will be factored into the interest rate associated with the loan. Of course, this also means that, all other things being equal, the interest rate associated with a no-cost mortgage will always be higher than one where the borrower pays the closing costs up front.

And there's one more distinction to pay attention to: the difference between a no-cost mortgage and a no-cash mortgage. "No cash" means that the closing costs will be added to the balance of the amortized loan, and the borrower will pay these costs over time. This is a very important distinction, because the borrower will pay interest on any and all fees added to the loan balance.

Don't be intimidated by all these details. Use one of the many free mortgage calculators available on the Internet to figure out how much your loan is going to cost you. Remember that a "point" is simply a percentage point, so with a $200,000 mortgage that has an interest rate of 5% plus 1 point, the "point" will cost this borrower one percent of $200,000, or $2,000. Easy.
A homeowner who has done the math and figured out that refinancing could save lots of money over time, and who has committed to refinancing their mortgage, should not procrastinate. In general, home values have been declining across the country, and may continue doing so for the rest of the year. Declining home values translate to declining equity, and the typical mortgage lender will offer the best refinance deals to homeowners who have at least 20% equity in their home (25% for a cash-out refinance.) A homeowner may be able to refinance a home that has less than 20% equity, but these loans are not easy to find in the current economic environment, and the terms associated with such loans wouldn't be attractive.
Homeowners who want to refinance but can't because they owe more on their home than their home is worth (also known as "upside down") should focus their time and energy on making more money. Adding a part-time job or starting a side business will bring extra income into the household, income that can be used to make extra payments a mortgage.

Both new homebuyers and refinancers should be prepared to do lots of shopping around, not only to get as many free quotes and good faith estimates as possible, but also because many lenders are overwhelmed with applications right now and may turn away even the best borrowers. Borrowers who aren't confident with their deal-hunting or negotiating skills can seek help from mortgage professionals, but they should also consider buying highly recommended books on mortgages from their favorite online bookseller.