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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