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Prime Rate

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

Wednesday, May 17, 2006

Odds on Another Prime Rate Increase at the End of June Rise As A Result of Today's CPI Report

This morning, The U.S. Department of Labor's Bureau of Labor Statistics released their Consumer Price Index (CPI) report for the month of April, 2006. The report showed that consumer prices rose at a faster-than-expected rate last month, and since the CPI is a report that is watched closely by the Fed, many investors, academics and economists believe that there is now an increased likelihood that the Federal Open Market Committee (FOMC) will elect to raise the benchmark Fed Funds Target Rate from 5.00% to 5.25% at the next monetary policy meeting, which is set to take place on June 28-29, 2006.

The Latest Odds on Another Prime Rate Increase Next Month

As you might have guessed, the folks who trade in Federal Funds Futures have shifted the odds (according to current pricing) on another rate hike by the Fed as a result of today's news: the odds on the FOMC voting to raise the cardinal Fed Funds Target Rate to 5.25% at the June 28-29 monetary policy meeting have risen to 50%. Prior to today's CPI report, odds on another 0.25 percentage point increase were at 36%.

Just a reminder: The U.S. Prime Rate = (The Fed Funds Target Rate + 3)

So, according to today's odds, there's a 50/50 chance that we'll have a national Prime Rate of 8.25% after June 29, 2006.

The current U.S. Prime Rate (Wall Street JournalĀ® Prime Rate) is 8.00%, and, as of right now, forecasters are "on the fence" as to whether the Prime Rate will rise to 8.25% at the end of June.

The odds related to the Fed Funds Futures trade--widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate--are continually changing, so stay tuned for the latest odds, especially when The FOMC releases the minutes from the May 10, 2006 monetary policy meeting, which should take place on May 31st, 2006.



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