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

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..."

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

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).

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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)
  

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.

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

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.

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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)
  

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.

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

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..."

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

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.

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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)
  

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.

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

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..."

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• 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%.
  

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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)
  

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.

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