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Prime Rate

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

Thursday, August 03, 2006

Probability of Another Rate Hike Jumps Back Up to Around 43%

Judging by the numbers is today's economic reports, one might expect the odds on another rate hike by the Fed to decline, but instead, the odds related to the pricing on Fed Funds Futures contracts have jumped back up to around 43%.

The economy continues to show signs of slowing, with lower-than-expected Factory Orders in June, and higher-than-expected claims for unemployment insurance benefits in the week that ended on July 29.

So why have the odds gone up instead of down?

Well, it's all about the Employment Situation report that's going to be released tomorrow, a report that carries a lot of weight with forecasters and investors. The odds on another rate hike have gone up because, as of right now, Wall Street economists are predicting that tomorrow's report will show that around 150,000 jobs were created in July, and if the forecasters get it right, it will translate to an increased likelihood that the Fed will raise rates again, in an effort to keep wage inflation in check.

To give you some more perspective: on July, 7, 2006, the Labor Department reported that the U.S. economy added 121,000 jobs in June, 2006. The last Federal Open Market Committee (FOMC) monetary policy meeting was on June 28-29, so, if the prediction that 150,000 new jobs were created last month holds true, then the FOMC will have witnessed about 271,000 jobs (121K for June + 150K for July) created since their last policy meeting.

In other words, if the jobs prediction turns out to be accurate, then we should expect the odds on another rate hike to rise above the current 43% after the release of the Employment Situation report tomorrow.

Simple Summary of the Latest Prime Rate Forecast:

  • Current odds that the Prime Rate will rise
    to 8.50% on August 8, 2006: 43%

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 stay tuned to this blog for the latest odds, especially tomorrow after the Labor Department releases the July, 2006 Employment Situation report.

In other interest rate news today, the European Central Bank (ECB) raised its benchmark lending rate by 25 basis points to 3.0%. The Bank of England (BOE) also raised it's benchmark interest rate today, by 0.25 percentage point to 4.75%.



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