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Prime Rate

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

Friday, November 03, 2006

Probability of A Rate Cut In March Drops to 11% on Employment Situation Report

The national Prime Rate is 8.25% right now, and it still looks like it's going to stay there for some time. That's because the economy is still sending mixed signals, which will most likely prompt the Fed stay on the sidelines and leave short-term interest rates alone for a while.

Today's jobs report was surprising to many economists. The Employment Situation report for October showed that 92,000 jobs were created last month, and though non-farm payrolls missed expectations (prognosticators had predicted around 130,000 new jobs for October), the Labor Department report also showed that the unemployment rate dropped to an impressive 4.4%. Furthermore, non-farm payrolls for months prior to October have been revised much higher than initially reported: from 51K to 148K for September, and from 128K to 230K for August. Clear signs that the economy is doing just fine, thank you very much.

Another reason for the Fed to worry about inflation: preliminary data indicate that there was no increase in productivity during the third-quarter, and Unit Labor Costs rose at a faster-than-expected pace.

But then again, other government reports released recently indicate that the economy is still on the wane. For example, Construction Spending fell by 0.3% in September, and the initial, third-quarter GDP estimates show an overall gain of 1.6% for the U.S. economy (economists were expecting 2.0%.) And, of course, there's the recent report on New Home Sales, which indicates that the all-important housing sector is continuing in a negative direction.

Bottom line: the way things look right now, we may have to wait until the flowers of spring start to bloom -- or even longer -- before the Fed cuts short-term interest rates.

The Latest Odds

Of course, investors reacted to today's employment news. As of right now, the folks who trade in Fed Funds Futures have odds at around 11% (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 at the March 21ST, 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: 2% (very unlikely)

  • Current odds that the Prime Rate will be cut to
    8.00% on March 21ST, 2007: 11%

  • 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 November 14TH, after the Fed releases the minutes from the October 25TH monetary policy meeting.



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