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Prime Rate

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

Saturday, September 02, 2006

The Latest Odds Suggest That The Fed Is Done with Raising Rates for 2006

The 2 years of policy tightening that came to an end this past June may be just that: an end, and not a pause. Raising interest rates to fight inflation, without pushing the economy into recession, is a tricky matter, but it looks like the Federal Open Market Committee (FOMC) may have pulled it off. The economy is definitely slowing, but recent data suggest that it's coming in for a soft landing, and not crashing: Factory Orders and Construction Spending fell in July, but, on the flip side, the closely-watched Employment Situation Report indicates that unemployment fell from 4.8% to 4.7% in August, 2006, and 128,000 jobs were created.

While inflation is still a concern, the slowing economy should be enough to get inflation to cry uncle. It is, therefore, very likely that the FOMC will choose to leave interest rates alone at the September 20TH monetary policy meeting. Remember: the ripple effect of a policy move by the Fed can take anywhere from 3 to 18 months to make its way through the economy.

At my most recent check, the investors who trade in Fed Funds Futures have odds at about 6% (according to current pricing on contracts) that the 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 raise the Fed Funds Target Rate to 5.50% by the end of this year fell to around 12% some time after the August, 2006 Employment Situation report was released yesterday.

Summary of The Latest Prime Rate Predictions:

  • Current odds that the Prime Rate will rise
    to 8.50% on September 20TH, 2006: 6%

  • Current odds that the Prime Rate will rise
    to 8.50% by the end of the year: 12%

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

The current U.S. Prime Rate (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 FOMC -- are continually changing, so stay tuned for the latest odds.

In website news, we've recently added a page featuring foreign prime rates. The foreign prime rates page will be updated on a weekly basis.



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