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Prime Rate

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

Wednesday, October 25, 2006

Fed Votes To Leave Interest Rates Alone: Prime Rate Remains at 8.25%

In line with the latest predictions, the Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned their seventh monetary policy meeting of 2006, and elected to leave interest rates at their present level. Therefore, the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street JournalĀ® Prime Rate (the nationwide Prime Rate) will remain at the current 8.25%.

The Fed has voted to leave interest rates unchanged 3 times in a row now, and Fifth District Federal Reserve Bank President Dr. Jeffrey M. Lacker has dissented 3 times in a row as well, voting once again for a 25 basis point (0.25 percentage point) increase for the Fed Funds Target Rate. A suitable moniker for Dr. Lacker: Jeffrey "Inflation Hawk" Lacker.

Prime Rate Forecast: Predictions for the Prime Rate

The Fed is still counting on the cooling economy to help douse the flames of inflation moving forward, so at the December 12 monetary policy meeting -- the last of 2006 -- the group is likely to repeat today's inaction and leave interest rates at their current level.

More evidence that the U.S. economy is waning came in today. The National Association of RealtorsĀ® released the September, 2006 Existing Home Sales report earlier this morning: existing home sales fell by 1.9% to 6,180,000 units last month. That's 14.2% lower than the September, 2005 level.

As of right now, the investors who trade in Fed Funds Futures have odds at around 10% (according to current pricing on contracts) that the FOMC will elect to raise the benchmark Fed Funds Target Rate by 25 basis points at the January 31ST, 2007 monetary policy meeting.

Summary of the Latest Prime Rate Predictions:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the December 12TH FOMC monetary policy meeting.

  • Current odds that the Prime Rate will rise
    to 8.50% on January 31ST, 2007: 10% (unlikely)

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

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 to this blog for the latest odds. Odds may experience a significant shift when the Fed releases the minutes from today's policy meeting on November 14TH. (TIP: type the easy-to-remember URL www.PrimeRatePredictions.com into your web browser as a shortcut to this blog, or, if you prefer, www.PrimeRateForecast.com).

Here's a clip from the press release that was issued by the FOMC this afternoon:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting."

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