United States Prime Rate

also known as the Fed, National or United States Prime Rate,
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Tuesday, January 31, 2006

Prime Rate Increase Today: The WSJ Prime Rate Is Now 7.5%

As expected, The Federal Open Market Committee (FOMC) of The Federal Reserve Board has just voted to raise The Federal Funds Rate by 25 basis points (0.25 percentage points) to 4.5%. This means that the de facto Wall Street Journal Prime Rate (the U.S. Prime Rate) is now 7.5%. Many American banks have already released statements announcing that their prime lending rate is now 7.5%, including:

  • The Bank of America*
  • The Bank of New York*
  • Wells Fargo*
  • Wachovia*
  • KeyCorp*
  • SunTrust*
  • Colonial Bank*
  • Sky Financial Group*

Today's rate increase comes as no surprise to economists, bankers and rate watchers, as most have been predicting a quarter point increase from The Fed today. Today's Fed Funds Rate increase-- and subsequent prime rate increase--is the 14th straight bump to these key banking interest rates, and it looks like more rate increases are coming as the year progresses.

Prime Rate Predictions

According to the latest economic data, the economy is doing well, and if the economy continues to do well, then another rate increase is likely, as The Fed will try to cool things down in an effort to stave-off inflation. The Fed is also keenly interested in attaining what's called the "neutral rate" for the Federal Funds Rate: the neutral rate can be described as a Fed Funds Rate that neither encourages nor curtails U.S. economic growth. Most economist believe that with the current Fed Funds Rate of 4.5%, we aren't quite @ "neutral" yet, so at least one more 0.25 percentage point increase should be expected.

The majority of economists who responded to a recent poll are predicting that The Fed Funds Rate will be bumped up to 4.75% by the end of June, 2006, and that it will remain @ 4.75 for the rest of 2006. Since the prime rate can be expressed as:

U.S. Prime Rate = The Fed Funds Target Rate + 3

then, according to the latest predictions, the WSJ Prime Rate should hit 7.75% by mid-summer and stay @ 7.75% for the rest of the year.

A minority of the folks who deal in government securities that are associated with The Fed are predicting that The Fed will raise The Fed Funds Rate to 5% by the end of 2006.

Of course, there are many, continually shifting variables that have an effect on The Fed's interest rate strategy, foremost being inflation, but there are also many other important measures of the U.S. economy that The Fed watches closely. And let's not forget that a new Fed Chairman taking is over tomorrow--so prime rate predictions should always be viewed with a skeptical eye.

Alan Greenspan Exits As Ben Bernanke Is Confirmed As The New Fed Chairman

Alan Greenspan leaves his post as Fed Chairman today as a banking celebrity (there are even rock songs that invoke his name!) and it's no surprise if you think about it.

The economy is cyclical, so there will always be periods of economic growth, followed by periods of economic sluggishness, then growth again, and so on ad infinitum. As Chairman of The Federal Reserve Board, Dr. Greenspan was in charge of U.S. monetary policy during America's longest sustained economic expansion of the postwar period, and that is nothing to sneeze at. Greenspan should be proud of his accomplishments--no doubt--but we should also keep the other side of the coin in mind: how much credit can we bestow on Greenspan when in fact his only real power was controlling banking interest rates? Was the expansion of the 90's a bad thing, since e.g. many of those billion-dollar-burn-rate, dotcom companies ended up going nowhere? Did Greenspan & Co. set interest rates too low, creating a massive real estate bubble that will end up hurting American consumers in the long term? Did low interest rates help to turn Americans into borrow-crazy consumers with little or no savings?

I personally think that Alan Greenspan did a good job, especially the way he handled the country's banking situation after the 911 attacks. To put things into perspective, check out the way interest rates were going in the early 80's before Greenspan took over: not a pretty picture! The way I see it, Greenspan could have done much worse, and that is the bottom line.

Greenspan will now go back to economic consulting, which is what he was doing before going into public service; the latest (unconfirmed) buzz is that Greenspan's new consulting firm will be called Greenspan Associates. I think it's safe to write that, as a consultant, Greenspan will charge whatever he wants for his services, and he'll get it.

Ben Bernanke was confirmed to take over as The Fed Chairman today, and I wish him well; officially, Bernanke will take the helm tomorrow morning. Bernanke steps up to the plate with excellent credentials so I doubt that Americans have anything to worry about. Many would rather just clone Greenspan and give the facsimile two terms as Fed chief; just nervousness about a new face, that's all.

The next FOMC meeting--which will be the first with Ben Bernanke calling the shots--will take place on March 28, 2006, and, as of right now, most experts are predicting another 0.25 percentage point increase to The Fed Funds Rate (which would translate to a 0.25 percentage point increase to the WSJ Prime Rate.) Stay tuned to the Prime Rate Blog as I'll be posting the latest buzz about prime rate predictions between now and the end of March.

Here's a snippet from today's press release issued by The Fed:

"The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-1/2 percent.

Although recent economic data have been uneven, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.

The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Jack Guynn; Donald L. Kohn; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; and Janet L. Yellen."

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Saturday, January 28, 2006

The Latest Odds Related That A Prime Rate Increase Will Happen At The End of March

Prime Rate Increase Coming Next Week

It's virtually a foregone conclusion that The Fed will raise The Fed Funds Rate by 0.25 percentage points after the Federal Open Market Committee (FOMC) meets next Tuesday (which will translate to a 0.25 percentage point increase of the published Wall Street Journal Prime Rate.)

Odds of A Prime Rate Increase After The Second FOMC Meeting of 2006

The latest news comes from the folks who trade in Fed Funds Futures: fed funds traders are now predicting that there's a 78% chance that The FOMC will increase the Fed Funds Rate by another 25 basis points when The FOMC meets on March 28, 2006. Two weeks ago, the odds of another quarter point increase for March were 58%, so it's a significant jump. Of course, with a new Federal Reserve Chairman coming in, prime rate predictions for March 2006 should be taken with a grain of salt.

Be sure to stop by again on Tuesday, January 31, 2006 for news about prime rate changes.

The current prime rate is 7.25%.

Click here for The FOMC meeting schedule.

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Thursday, January 26, 2006

A Strong Durable Goods Orders Report Increases The Likelihood That The Fed Will Raises Rates In March

Most economists are predicting that The Fed will raise their Fed Funds Target Rate when the FOMC meets next week, but there is still some uncertainty about what The FOMC will do when they meet at the end of March.

According to today's Durable Goods Orders (DGO) report (released by The Commerce Department) for December, 2005, DGO increased by 1.3%, an increase that may convince The Fed that the economy needs some cooling-off, which may translate to another 25 basis point increase to The Fed Funds Rate on March 28, 2006.

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Tuesday, January 03, 2006

Prime Rate Predictions Abound As The Fed Releases FOMC Minutes

Economists, bankers, and all kinds of money experts are enthusiastically making predictions about where the U.S. prime rate is headed. The latest buzz about interest rates comes as a result of today's release of minutes from The Fed's last FOMC meeting. The experts agree that a 25 basis point (or 0.25 percentage point) increase to the Fed Funds Rate will almost certainly happen after The Fed meets on January 31, 2006; this would translate to a 25 basis point increase to the Wall Street Journal Prime Rate. Economists and other rate watchers, now more confident about their prime rate predictions, are now turning their attention to predicting what The Fed will do at the second FOMC meeting of 2006, which should occur on March 28. Folks who trade in Fed Funds Futures are predicting a 56% chance that The Fed will raise the Fed Funds Rate again at the end of March, 2006. However, if current trends related to economic growth and inflation remain more or less consistent, then The Fed should have no reason to raise rates at the end of March.

Inverted Yield Curve
On 4 of the last 6 days, the yields related to short and long term U.S. Treasury Notes experienced an inversion (aka an inverted yield curve.) When the return on 2-year U.S. Treasury Notes is higher than the yield on 10-year notes, you've got yourself a inverted yield curve. Since an inversion of U.S. Treasury Bond yields almost always precedes a recession or economic slowdown, many economists feel that this inverted yield situation will influence The FOMC: The Fed won't be inclined to raise interest rates in March if the economy has the vitality of a tree sloth.

The Fed's FOMC Minutes
The minutes from the most recent FOMC meeting revealed a few important clues about what the nation can expect from The Committee in the future; here's an example:

"And although the cumulative rise in energy and other costs had the potential to add to inflation pressures, core inflation had been relatively low in recent months, and longer-term inflation expectations remained contained."

This is a good thing, adding to the likelihood that The Fed won't raise interest rates again in March, 2006.

New Faces @ The FOMC
There will be some fresh faces voting in The FOMC later this year, most notably a new Fed Chief: Ben Bernanke will most likely be confirmed by the U.S. Senate and will succeed Alan Greenspan as the new Chairman of the Board of Governors of the Federal Reserve System. The new faces @ The FOMC will certainly make interest rate predictions more difficult, and will probably cause some stock market heartburn for investors later this year, especially when Alan Greenspan completely disappears from the FOMC picture in March.

I wish Mr. Bernanke all the best in his new job, and I hope that he has as much success as Mr. Greenspan @ inflation-taming and managing U.S. economic growth.

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