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Prime Rate

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

Friday, October 06, 2006

Odds Shift On Employment Situation Report: Prime Rate Cut A Bit Less Likely for January 31

Earlier today, the Department of Labor's Bureau of Labor Statistics released the Employment Situation Report for September, 2006. An interesting mix of numbers this time around: the report indicates some weakness, as only 51,000 new jobs were created (prognosticators were predicting 125,000 new jobs), but the report also shows that the unemployment rate dropped from 4.7% to 4.6%, which is pretty clear indication that the U.S. economy is doing A-OK.

The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at about 19% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to lower the benchmark Fed Funds Target Rate by 25 basis points to 5.00% at the January 30-31, 2007 monetary policy meeting. Odds on a rate cut for March 21, 2007 are now at 50% (on the fence.)

Summary of the Latest Prime Rate Predictions:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the next two FOMC monetary policy meetings (October 24TH and December 12TH)

  • Current odds that the Prime Rate will be cut
    to 8.00% on January 31ST, 2007: 19%

  • Current odds that the Prime Rate will be cut
    to 8.00% by March 21ST, 2007: 50%

  • 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 for the latest odds. Odds may experience a significant shift on the release of the following government reports:

  • Wednesday, October 11, 2006: Fed releases minutes from the September 20 FOMC monetary policy meeting.

  • Tuesday, October 17, 2006: Labor Department releases the Producer Price Index report for September.

  • Wednesday, October 18, 2006: Labor Department releases the Consumer Price Index report for September.

  • Thursday, October 19, 2006: The Conference Board releases the Leading Economic Indicators report for September.



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