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Prime Rate

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

Friday, May 25, 2007

Probability of A Rate Cut for The September 18, 2007 FOMC Monetary Policy Meeting Now At 16%

A rate cut by the Fed at some point this year is now an even more remote possibility, thanks to an encouraging report on new home sales and escalating crude oil prices.

Housing Turnaround?

Though mortgages rates are still at historically low levels, subprime lending is on the decline, a fact that contributed to existing home sales falling by 2.6% last month. New home sales, on the other hand, jumped by a strong 16.2% in April. The new homes sales figure for April -- 981,000 -- was considerably higher than the 860,000 or so that Wall Street forecasters were expecting. Investors interpreted the new home sales numbers as a hint that the U.S. housing sector may be headed for a turnaround, maybe.

The Summer Driving Season is Upon Us

Placing upward inflationary pressure on the U.S. economy right now: rising crude oil prices. A barrel of crude oil for future delivery closed at $65.20 today; that's 5.28% higher than the closing price on May 4, 2007. $65 per barrel may seem high, but for some perspective, at this time last year -- May 26, 2006 -- crude oil finished the week at $71.29.

The Fed is still concerned about inflation, and the group won't cut short-term interest rates until the inflation threat is well-contained.

The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at around 16% (according to current pricing on contracts) that the FOMC will choose to lower the benchmark Federal Funds Target Rate by 25 basis points at the September 18TH, 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 June 28TH and August 7TH FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to 8.00% after the September 18TH, 2007 FOMC monetary policy meeting: 16% (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 report:

  • Friday, June 1, 2007: The Labor Department releases the May, 2007 Employment Situation report.

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