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Prime Rate

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

Saturday, August 12, 2006

Probability of A Rate Increase by The End of 2006 Rises to 74% On Retail Sales Report

Yesterday, the Commerce Department released advanced estimates of retail and food services sales for last month: sales were up by 1.4%, while Wall Street forecasters were expecting a rise of 0.8%. The numbers in the latest retail sales report have triggered a shift in the odds related to future rate increases by the Fed, as the Fed may see the July sales figures as an inflation threat.

At my most recent check, the investors who trade in Fed Funds Futures have odds at about 27% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will elect 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 Fed Funds Target Rate will hit 5.50% by the end of 2006 jumped to 74% after the retail sales figures for July were released yesterday.

Summary of The Latest Prime Rate Forecasts:

  • Current odds that the Prime Rate will rise
    to 8.50% on September 20TH, 2006: 27%

  • Current odds that the Prime Rate will rise
    to 8.50% by the end of the year: 74%

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

The current U.S. Prime Rate is 8.25%.

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 continually changing, so stay tuned for the latest odds. Odds may experience a significant increase or decrease on Tuesday, August 15, when the government releases the Producer Price Index (PPI) numbers for July, and on Wednesday, August 16, when the Consumer Price Index (CPI) numbers are released.

(TIP: type the URL www.PrimeRatePredictions.com into your web browser as a shortcut to this blog, or, if you prefer, www.PrimeRateForecast.com).



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