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Prime Rate

also known as the Fed, National, U.S. and WSJ Prime Rate

Friday, February 24, 2006

Prime Rate Increase Still Very Likely On March 28TH, Despite Mixed Signals

Despite mixed signals from the latest government data on the economy, most economists, bankers and investors are still confident that another 25 basis point (0.25 percentage point) increase to the Federal Funds Rate is coming when the FOMC meets on March 28TH, 2006 (if the Fed Funds Rate goes up by 25 basis points on March 28TH, then the U.S. prime rate [WSJ prime rate] will also rise by 25 basis points).

Right now, the economy is doing OK, and if the economy continues to do well, then The FOMC will definitely raise rates on March 28TH so as to keep inflation in check. Unemployment is low, and, according to recent comments made by Dallas Federal Reserve Bank President Richard Fisher, the U.S. economy is on pace to grow by 4% or more this quarter.

The Fed has also been worried about the price of crude oil. Crude oil for future delivery started to get cheaper earlier this week, but recent violence in both Nigeria and Saudi Arabia (both countries export light sweet crude for the most part, the type of crude oil that is easiest to turn into gas and diesel fuel, which makes it the most valuable type of crude oil) have caused the price on crude to shoot back up above $62 per barrel. Political tensions in both Africa and The Middle East probably aren't going to disappear overnight, so the price on crude may remain high for some time, and the high cost of energy may "pass through"--as The Fed likes phrase it--and cause general prices increases for both consumers and producers: a.k.a. inflation.

The folks who trade is Fed Funds Futures still have odds @ 98% (according to current pricing) that The Fed will raise rates by 0.25 percentage points on March 28TH, and odds on another quarter point increase by The Fed @ the following FOMC meeting that's set to take place on May 10TH, 2006 have gone from 71% to 76%. In other words, according to current pricing on Fed Funds Futures, we'll probably have a national prime rate of 8% after May10TH, 2006.

The current published Wall Street JournalĀ® prime rate (U.S. prime rate) is 7.5%, and an increase to 7.75% is very likely on March 28TH, 2006.



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