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Prime Rate

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

Wednesday, June 28, 2006

The U.S. Prime Rate Will Rise Tomorrow

The Federal Open Market Committee (FOMC) is in the middle of their fourth monetary policy meeting of 2006, and tomorrow the FOMC will raise the benchmark Fed Funds Target Rate, most probably by 25 basis points (0.25 percentage point) to 5.25%; this in turn will cause the U.S. Prime Rate (WSJ Prime Rate) to jump from the current 8.00%, to 8.25%.

A small minority of rate watchers are predicting that the FOMC will raise the Fed Funds Target Rate by 50 basis points tomorrow, but such an aggressive move is not at all likely. A 0.50 percentage point increase tomorrow would be overkill. There's still plenty of home-buying going on, but in certain regions, there's clear evidence that the housing market is starting to cool off. A 25 basis point increase tomorrow, with another 25 basis point increase on August 8TH, should be enough to put the brakes on the economy without shocking the system. Overzealousness on the part of the Fed at this point in time could translate to deflation down the road, or even recession (if negative forces conspire.)

The Latest Forecast for The Prime Rate

According to current pricing on Fed Funds Futures contracts, investors are 100% certain that the FOMC will vote to raise the benchmark Fed Funds Target Rate to 5.25% tomorrow. The odds on another 25 basis point increase when the FOMC meets on August 8 are currently at 85%.

Here's a simple summary of the latest Prime Rate predictions:

  • Current odds that the Prime Rate will rise
    to 8.25% tomorrow: 100% (certain)

  • Current odds that the Prime Rate will rise
    to 8.50% on August 8, 2006: 85%

The odds related to Fed Funds Futures contracts--widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate--are constantly changing, so stay tuned to this blog for the latest odds. Tomorrow, the odds on Prime Rate increases for August 8, 2006 and beyond may change after investors, academics and economists have a chance to review the customary, post-monetary meeting FOMC press release.



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