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Prime Rate

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

Thursday, January 18, 2007

Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 12%

If you've been holding your breath in anticipation of a rate cut later this year, then you better have great health insurance. The likelihood of a rate cut for this year has been diminishing steadily over the past few months. And now, based on the latest economic numbers, the Fed is even less likely to lower short-term interest rates later this year.

There were some surprises in this week's economic reports:

  • Though consumer prices rose at a pace that economists were expecting last month, wholesale prices increased at a pace that was significantly higher than prognosticators were predicting. Bad news from the Fed's point of view, as many Federal Reserve officials have been and are still expressing concern about inflation. A (very) small minority of economists and investors are now predicting that the Fed may actually raise short-term interest rates by 25 basis points by the end of March in an effort to contain the inflation threat.

  • With plenty of new and preowned homes available for sale right now, economists were expecting around 1,590,000 housing starts last month. The actual figure was 1,642,000.

The Latest Odds

As of right now, Fed Funds Futures traders have odds at 12% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to lower the benchmark Federal Funds Target Rate by 25 basis points at the June 28TH, 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 January 31ST and March 21ST FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to
    8.00% on June 28TH, 2007: 12% (unlikely)

  • NB: Prime Rate = (The Federal 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 on the release of the following economic reports:

  • Thursday, January 25, 2007: The National Association of Realtors releases the Existing Home Sales report for December, 2006.

  • Friday, January 26, 2007: The Commerce Department releases the New Home Sales report for December, 2006.

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