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Prime Rate

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

Tuesday, May 09, 2006

Strong Consensus Among Rate Watchers: U.S. Prime Rate Will Increase to 8% Tomorrow

Tomorrow, the Federal Open Market Committee (FOMC)--the interest rate setting body within the Federal Reserve system--will hold their third monetary policy meeting of 2006. This is just a quick note to remind everyone that a 0.25 percentage point increase to the Prime Rate is fully expected by a wide range of rate watchers, so you can bet your bottom dollar that the Prime Rate will go from the current 7.75%, to 8% after tomorrow's FOMC meeting adjourns.

Prime Rate Forecast

Many economists are predicting a cooler U.S. economy in the coming months; earlier today, the National Association for Business Economics published a survey indicating that the economy will experience a slowdown this quarter. Of course, the Fed will pay close attention to the latest government reports on the economy, and if the Fed divines that economic activity is indeed cooling-off, then some economists believe that the FOMC may choose to pause their rate-raising regimen at the June 28-29 monetary policy gathering.

The Fed is looking to get to what's called the "neutral rate" for the Federal Funds Rate: the neutral rate can be described as a Fed Funds Rate that neither stimulates nor inhibits U.S. economic growth. The Prime Rate can be expressed as:

U.S. Prime Rate = (The Fed Funds Rate + 3)

Fed Funds Futures traders now have odds at about 40% (according to current pricing) that the FOMC will raise the benchmark Fed Funds Rate by another 25 basis points after the June 28-29 monetary policy meeting adjourns. Four days ago, Fed Funds Futures traders had odds at 48%.

Hang onto your wallets and purses, folks: borrowing is about to get more expensive.

The odds on future Prime Rate increases will most likely change when the FOMC--as usual--releases a statement when tomorrow's monetary policy meeting adjourns, so stay tuned for the latest odds.



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