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Prime Rate

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

Wednesday, October 11, 2006

Rate Cut for January 31 Now Unlikely

Rate watchers who've been anticipating a rate cut for January, 2007 aren't going to be pleased with today's news: looks like the Prime Rate will remain at the current 8.25% beyond the January 30-31 Federal Open Market Committee (FOMC) monetary policy meeting.

Earlier today, the Federal Reserve released the minutes from the September 20 FOMC monetary policy meeting. Here's a clip:

"...In view of the most recent information on the economy, members agreed that it was appropriate for the post-meeting statement to characterize economic growth as apparently continuing to moderate. However, in view of still-high energy and other commodity prices and elevated rates of resource utilization as well as recent indications of a possible acceleration in labor costs, members continued to see a substantial risk that inflation would not decline as anticipated by the Committee. Consequently, the Committee agreed that the statement should again cite such risks to inflation and explicitly reference the possibility of additional policy firming..."

Yup, the economy is still on the wane. But many Fed officials are not comfortable with the current pace of inflation, thus reducing the probability that the Fed will lower rates soon. Recently, Federal Reserve Vice Chairman Donald Kohn, Philadelphia Fed President Charles Plosser, Dallas Fed chief Richard Fisher and San Francisco Fed boss Janet Yellen have all expressed concerns about rising prices and inflation in general. And, as you may recall, Fifth District Federal Reserve Bank President Jeffrey Lacker wanted to raise rates by 25 basis points on August 8 and on September 20.

The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at about 6% (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.

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: 6% (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 for the latest odds. Odds may experience a significant shift on the release of the following economic reports:

  • 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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