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Prime Rate

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

Wednesday, August 23, 2006

Odds On A Rate Increase for Next Month Drop to 11% On Slowing Housing Market

Earlier today, the National Association of Realtors¨ released the existing home sales numbers for July, 2006: 6,330,000. Forecasters were expecting around 6,550,000. As you might have guessed, the slowing housing market has led to a shift in the pricing on Fed Funds Futures contracts, because the Fed is less likely to raise interest rates while the economy is showing clear signs of cooling, and risk deflation or a recession.

At my most recent check, the folks who trade in interest rate futures have odds at about 11% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to raise the benchmark Fed Funds Target Rate by 25 basis points to 5.50% at the September 20TH monetary policy meeting. The probability that the FOMC will take the Fed Funds Target Rate to 5.50% by the end of 2006 fell to 43% some time after the July, 2006 Existing Homes Sales report was released.

Summary of The Latest Prime Rate Forecasts:

  • Current odds that the Prime Rate will rise
    to 8.50% on September 20TH, 2006: 11%

  • Current odds that the Prime Rate will rise
    to 8.50% by the end of the year: 43%

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

The current WSJ Prime Rate is 8.25%.

The odds related to the pricing on Fed Funds Futures contracts -- widely accepted as the best predictor of future monetary policy moves by the Fed -- are continually changing, so stay tuned to this blog for the latest odds.



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