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Prime Rate

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

Tuesday, June 20, 2006

Prime Rate Increase on June 29 Still Very Likely; Odds On An August 8 Increase Are Rising

Earlier today, the U.S. Commerce Department released the Housing Starts report for May, 2006. The actual number of housing starts for May was higher than Wall Street forecasters were expecting, and now many private and public-sector economists, academics and investors believe that there is an increased likelihood of yet another Prime Rate increase when the Federal Open Market Committee (FOMC) adjourns the monetary policy meeting that's scheduled to take place on August 8, 2006.

The Fed pays close attention to the nation's housing situation; the Fed is now more likely to raise interest rates in an effort to slow the economy and control inflation, because Americans were buying new homes at an unexpectedly high rate in May.

The Latest Prime Rate Predictions for June 29 & August 8

According to current pricing on Federal Funds Futures contracts, investors are still certain that the FOMC will vote to raise the benchmark Fed Funds Target Rate to 5.25% on June 29. The odds on another 0.25 percentage point increase when the FOMC meets on August 8 are now at about 75% as a result of today's housing starts report.

Here's a simple summary of the latest forecasts:

  • Current odds that the Prime Rate will rise
    to 8.25% on June 29, 2006: 100%

  • Current odds that the Prime Rate will rise
    to 8.50% on August 8, 2006: 75%

A friendly reminder of the relationship between the Fed Funds Target Rate and The U.S. Prime Rate:

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

If you plan on borrowing to make a major purchase, now may be a good time to secure the financing, as it looks like the WSJ Prime Rate (the national Prime Rate) is going to hit 8.50% by August 8. Of course, the odds are constantly shifting, so stay tuned for the latest numbers, especially after the government's New Home Sales report on Monday, and the Existing Home Sales report on Tuesday.



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