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Prime Rate

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

Wednesday, August 16, 2006

Probability of A Rate Increase for Next Month Drops to 22% On Encouraging Inflation Data

Is 17 the magic number? Maybe. According to this week's government reports on wholesale and consumer prices, the heavy sword of 17-straight interest rate hikes may have finally brought the inflation dragon to its knees. The encouraging numbers from this week's reports have led to a shift in the pricing on Fed Funds Futures contracts.

At my most recent check, the investors who trade in interest rate futures have odds at about 22% (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 FOMC will take the Fed Funds Target Rate to 5.50% by the end of 2006 fell to 47% some time after this morning's release of the Consumer Price Index (CPI) figures for July.

Summary of The Latest Prime Rate Forecasts:

  • Current odds that the Prime Rate will rise
    to 8.50% on September 20TH, 2006: 22%

  • Current odds that the Prime Rate will rise
    to 8.50% by the end of the year: 47%

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

The current U.S. 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 probability numbers. (TIP: type the URL www.PrimeRatePrediction.com into your web browser as a shortcut to this blog, or, if you prefer, www.PrimeRateForecast.com).



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