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Prime Rate

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

Friday, July 28, 2006

Odds On A Prime Rate Increase for August 8 Drop to 31% on Release of GDP "Advance" Numbers for Q2

Earlier today, the Commerce Department released the Gross Domestic Product (GDP) "Advance" numbers for Q2, 2006. Forecasters were expecting a 3.2% rise in GDP, but the actual figure was 2.5% (annualized.) To give you some more perspective, the "Final" GDP numbers from Q1, 2006 indicated that the economy grew at an annual rate of 5.6%.

Yup, the economy is definitely showing signs of slowing, and a slowing economy means that the Fed is less likely to raise interest rates again at the August 8TH Federal Open Market Committee (FOMC) meeting.

As you might have guessed, the investors who trade in Fed Funds Futures have reacted to today's GDP report. According to my latest check on the pricing of interest rate futures contracts, the odds that the FOMC will elect to raise the benchmark Fed Funds Target Rate to 5.50% on August 8TH have dropped to around 31%.

Simple Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will rise
    to 8.50% on August 8, 2006: 31%

  • NB: Prime Rate = (The Target Fed Funds Rate + 3)

The odds related to the Fed Funds Futures trade--widely accepted as the best predictor of where the FOMC will take the benchmark Federal Funds Target Rate--are continually changing, so stop by often for the latest odds. Odds may shift on Tuesday, August 1, when the Commerce Department releases their report on consumer spending, and on Friday, August 4, when the Labor Department releases their monthly Employment Situation report.



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