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Prime Rate

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

Wednesday, May 10, 2006

Prime Rate Increase Today: U.S. Prime Rate Is Now 8.00%

If you have plans to access money in the near future via an Adjustable Rate Mortgage (ARM), a car loan or a shiny new variable rate credit card, then we have some news that you should know about: in accordance with all the reliable interest rate predictions and forecasts, the Federal Open Market Committee (FOMC) of The Federal Reserve has just raised its target for the benchmark Federal Funds Rate by 25 basis points (0.25 percentage point) to 5.00%. Therefore, as of this afternoon, the de facto Wall Street JournalĀ® Prime Rate (the U.S. Prime Rate) is now 8.00%. Many American banks have already issued a press release announcing that their prime lending rate has increased from 7.75% to 8.00%, including:

  • The Bank of America*
  • Northern Trust*
  • PNC*
  • Harris N.A.*
  • Dollar Bank*
  • National City*
  • Comerica Bank*
  • Wells Fargo*
  • KeyCorp*
  • U.S. Bancorp*
  • M&T Bank*
  • SunTrust*
  • Wachovia*
  • Sky Financial*

The Fed has raised it's target for the Fed Funds Rate 16 times in a row since June, 2004.

Prime Rate Prediction: Forecast for The Prime Rate

The economy has been moving ahead at a strong pace since the start of 2006, so predictions have been quite easy to make, as economists, academics and investors knew that the Fed would raise rates in order to control inflation. Now that certain signals are indicating that the economy may be slowing down, predictions about the Fed's next move related to interest rates will be a bit trickier.

As of right now, Fed Funds Futures traders have odds at about 42% (according to current pricing) that the FOMC will raise the benchmark Fed Funds Target Rate by another 25 basis points when the June 28-29 monetary policy meeting adjourns. Yesterday, Fed Funds Futures traders had odds at 40%.

The odds related to Fed Funds Futures trade are continually changing, so stay tuned for the latest odds, especially when The FOMC releases the minutes from today's meeting, which should happen on May 31st, 2006.

Here's a snippet from the press release that was issued by the Fed moments ago:

"The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5 percent.

Economic growth has been quite strong so far this year. The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.

The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen."

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