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Prime Rate

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

Friday, March 16, 2007

FOMC Meets On Wednesday: No Action Expected

The numbers from two critical inflation gauges were released this past week: the Producer Price Index (PPI) and the Consumer Price Index (CPI). Both the February CPI and the February PPI were higher than Wall Street was expecting, which translates to an decreased likelihood that the Fed will lower short-term interest rates later this year.

February Industrial Production was also higher than forecasters were expecting, which gives the Fed another reason to be concerned about inflation.

Whether or not the Fed will lower interest rates later this year is still hard to predict at this point. As for next Wednesday's Fed meeting (March 21ST), the vast majority of economists, academics and Wall Street forecasters agree that the Federal Open Market Committee (FOMC) will leave the Fed Funds Target Rate at 5.25%, which means the U.S. Prime Rate (WSJ Prime Rate) will remain unchanged at 8.25%.

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 30% (according to current pricing on contracts) that the 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 Forecast:

  • In all likelihood, the Prime Rate will remain at the current 8.25% after the March 21ST and May 9TH FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to 8.00% after the June 28TH, 2007 FOMC monetary policy meeting: 30% (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 for the latest odds.

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