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Prime Rate

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

Friday, June 02, 2006

Likelihood of Another Prime Rate Hike Decreases On Slowing Job Growth

Earlier today, The U.S. Department of Labor's Bureau of Labor Statistics released their Employment Situation report for May, 2006. Though unemployment is still low (many nations around the world would love to have an unemployment rate of 4.6%!), the economy provided for 75,000 new jobs, which was disappointing, as academics and Wall Street forecasters were expecting non-farm payrolls to increase by about 180,000 last month.

With fewer-than-expected jobs added last month, the Fed is now less likely to raise the benchmark Fed Funds Target Rate at the next monetary policy meeting on June 29, because the Fed won't have to worry too much about wage inflation: when job seekers are plentiful, there's less pressure on employers to offer relatively higher salaries.

The Latest Odds on Another Prime Rate Increase on June 29

Federal Funds Futures traders now have odds (according to current pricing) @ 48% that the Federal Open Market Committee (FOMC) will elect to raise the benchmark Fed Funds Target Rate by 25 basis points (0.25 percentage point) at the June 28-29 FOMC monetary policy meeting. Prior to today's Employment Situation report, odds were at 72%.

If the FOMC votes to raise the Fed Funds Target Rate to 5.25% on June 29, then the national Prime Rate (Wall Street JournalĀ® Prime Rate) will increase from the current 8.00%, to 8.25%.

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.



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