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Prime Rate

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

Friday, May 04, 2007

Probability of A Rate Cut for The August 7, 2007 FOMC Monetary Policy Meeting Now At 17%

The Federal Open Market Committee (FOMC) will convene the next monetary policy meeting next week (Wednesday, May 9, 2007) and it is a very safe bet that the Fed will opt to leave the benchmark Fed Funds Target Rate at 5.25%, which means that Prime Rate will remain at 8.25%.

The Fed is also very likely to leave interest rates at their current level after the June 28TH monetary policy meeting.

As for the future beyond June of this year, the fed funds futures market -- the best predictor of where interest rates are headed -- is currently pricing in odds at near 100% that the Fed will lower rates by 25 basis points (0.25 percentage point) by the time the December 11TH, 2007 monetary policy meeting is upon us (it's important to note that predictions based on the fed funds futures market are most accurate 45 days into the future, due to the numerous economic variables involved.)

Influencing the fed funds futures market this week were some encouraging reports on U.S. manufacturing and productivity, but the week ended on a somewhat down note with the Labor Department's release of the jobs figures for April. Economists were expecting the new payrolls figure to be at or around 100,000, but the U.S. economy added 88,000 jobs last month. Furthermore, the unemployment rate rose from 4.4% to 4.5%, and the new payrolls figures for both March and February were revised downward.

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 17% (according to current pricing on contracts) that the FOMC will opt to lower the benchmark Federal Funds Target Rate by 25 basis points at the August 7TH, 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 and June 28TH, 2007 FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to 8.00% after the August 7TH, 2007 FOMC monetary policy meeting: 17% (very 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, May 11, 2007: The Labor Department releases the Producer Price Index (PPI) report for March, 2007.

  • Tuesday, May 15, 2007: The Labor Department releases the Consumer Price Index (CPI) report for March, 2007.

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