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Prime Rate

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

Wednesday, March 22, 2006

Odds on Prime Rate Increases Change After Fed Chief Bernanke Speaks

Federal Reserve Chairman Dr. Ben S. Bernanke made a speech before the Economic Club of New York this past Monday evening, and, as you might expect, the odds on future interest rate increases have changed as a result.

The Latest Odds Related to Future Prime Rate Increases
Investors who trade is Federal Funds Futures still have odds at 100% (according to current pricing) that The Fed will raise the cardinal Fed Funds Rate by 0.25 percentage points (25 basis points) when the Federal Open Market Committee (FOMC) reconvenes next Tuesday (March 28TH, 2006.) A quarter point hike of The Fed Funds Rate would, of course, cause the U.S. prime rate to increase from the current 7.5% to 7.75%.

The odds on another 25 basis point increase by The Fed @ the following FOMC that's scheduled to take place on May 10TH, 2006 have gone from 73% to 87%. So, according to current pricing on Federal Funds Futures, we could have a national prime rate of 8% when the May10TH, 2006 FOMC meeting adjourns.

Most economists are also predicting that The Fed will raise rates 2 more times before ending the rate raising regimen that started in July of 2004 (The FOMC has voted to raise interest rates by a quarter point at every FOMC meeting since July 1, 2004.) Bernanke has indicated that neither the current state of U.S. Treasury bond yields, nor the effect that higher interest rates will have on the nation's housing market are of particular concern.

As long as the critical economic indicators continue to show that the economy is moving forward at a healthy pace, then 2 more quarter point increases should be expected.

The current published Wall Street JournalĀ® prime rate (WSJ prime rate) is 7.5%, and the vast majority of experts from the academic, business and investment communities are predicting that the prime rate will rise to 7.75% when the FOMC meets in a little less than one week (March 28TH, 2006.)



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