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Prime Rate

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

Wednesday, June 06, 2007

Probability of A Rate Cut for The October 31, 2007 FOMC Monetary Policy Meeting Now At 10%

The Dow Jones Industrial Average (DJIA) lost almost 1% today (129.79 points) as many investors who were still daydreaming about the possibility that the Fed will cut short-term interest rates this year woke up. Fact is, the writing has been on the wall for some time now: Fed boss Ben Bernanke has been talking about the potential for inflation to rise above the Fed's comfort zone for some months now. Just yesterday, Dr. Bernanke made the following remarks about inflation:

"...As expected, we have also seen a gradual ebbing of core inflation, although its level remains somewhat elevated. Despite recent increases in the prices of crude oil and gasoline, energy prices overall are below last year’s peak; the rate of increase in shelter costs seems likely to slow, although the timing remains uncertain; and long-run inflation expectations, as derived from both surveys and market-based measures of inflation compensation, have remained contained. However, although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside. In particular, the continuing high rate of resource utilization suggests that the level of final demand may still be high relative to the underlying productive capacity of the economy..."

A key report on U.S. productivity and labor costs released today acted as an extra splash of cold water for investors. For Q1, 2007, the non-farm productivity gain was revised downward to 1.0%, and the unit labor costs figure was revised up to 1.8%.

The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at 10% (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 October 30-31ST, 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, August 7TH and September 18TH FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to 8.00% after the October 31ST, 2007 FOMC monetary policy meeting: 10% (very unlikely)

  • NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Federal 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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