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Prime Rate

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

Friday, July 06, 2007

Current Odds Suggest The U.S. Prime Rate Will Hold at 8.25% Into 2008

The latest odds suggest that the U.S. Prime Rate will remain at the current 8.25% right into 2008. Influencing the fed-funds futures market this week:

  • The June Employment Situation report. According to the Labor Department, 132,000 new, non-farm jobs were added to the American workforce last month, and the unemployment rate held steady at 4.5%. Furthermore, the number of non-agricultural jobs added during May and April was revised significantly higher.

  • The Institute for Supply Management's Purchasing Manager's Index (PMI) for June was reported at 56% (any figure above 50% indicates that the manufacturing sector of the U.S. economy is expanding.)

The positive news related to U.S. employment and manufacturing translates to an increased likelihood that the Fed will keep short-term interest rates at their current level for the rest of the year.

The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at 6% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) of the Federal Reserve will elect to lower the benchmark Federal Funds Target Rate by 25 basis points at the December 11TH, 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 August 7TH, September 18TH and October 31ST FOMC monetary policy meetings.

  • Current odds that the Prime Rate will be cut to 8.00% after the December 11TH, 2007 FOMC monetary policy meeting: 6% (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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