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Prime Rate

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

Friday, April 06, 2007

Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 8%

Earlier today, the Labor Department released the Employment Situation report for March, 2007, and the numbers for March are strong. According to the report, 180,000 new jobs were added to the U.S. workforce last month (Wall Street was expecting 135,000 new jobs), and the unemployment rate fell from 4.5% to 4.4%.

The data in the March jobs report are a strong indication that the U.S. economy is doing quite well, which in turn means that the Fed is now less likely to lower short-term interest rates later this year.

Bottom line: The U.S. Prime Rate is now likely to remain at the current 8.25% right through the summer, and possibly into the fall as well.

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 8% (according to current pricing on contracts) that the FOMC will elect 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 May 9TH FOMC monetary policy meeting.

  • Current odds that the Prime Rate will be cut to 8.00% after the June 28TH, 2007 FOMC monetary policy meeting: 8% (very unlikely)

  • Current odds that the Prime Rate will be cut to 8.00% after the August 7TH, 2007 FOMC monetary policy meeting: 35% (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. Odds may experience a significant shift on the release of the following economic reports:

  • Friday, April 13, 2007: The Labor Department releases the Producer Price Index (PPI) report for March, 2007.

  • Tuesday, April 17, 2007: The Labor Department releases the Consumer Price Index (CPI) report for March, 2007.

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