Odds On A Rate Increase for Next Month Drop to 11% On Slowing Housing Market

Earlier today, the National Association of Realtors® released the existing home sales numbers for July, 2006: 6,330,000. Forecasters were expecting around 6,550,000. As you might have guessed, the slowing housing market has led to a shift in the pricing on Fed Funds Futures contracts, because the Fed is less likely to raise interest rates while the economy is showing clear signs of cooling, and risk deflation or a recession.

At my most recent check, the folks who trade in interest rate futures have odds at about 11% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to raise the benchmark Fed Funds Target Rate by 25 basis points to 5.50% at the September 20^TH monetary policy meeting. The probability that the FOMC will take the Fed Funds Target Rate to 5.50% by the end of 2006 fell to 43% some time after the July, 2006 Existing Homes Sales report was released.


Summary of The Latest Prime Rate Forecasts:

• Current odds that the Prime Rate will rise
  to 8.50% on September 20^TH, 2006: 11%
  
• Current odds that the Prime Rate will rise
  to 8.50% by the end of the year: 43%
  
  
• NB: Prime Rate = (The Fed Funds Target Rate + 3)

The current Fed Prime Rate is 8.25%.

The odds related to the pricing on Fed Funds Futures contracts -- widely accepted as the best predictor of future monetary policy moves by the Fed -- are continually changing, so stay tuned to this blog for the latest odds.

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Probability of A Rate Increase for Next Month Drops to 22% On Encouraging Inflation Data

Is 17 the magic number? Maybe. According to this week's government reports on wholesale and consumer prices, the heavy sword of 17-straight interest rate hikes may have finally brought the inflation dragon to its knees. The encouraging numbers from this week's reports have led to a shift in the pricing on Fed Funds Futures contracts.

At my most recent check, the investors who trade in interest rate futures have odds at about 22% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will elect to raise the benchmark Fed Funds Target Rate by 25 basis points to 5.50% at the September 20^TH monetary policy meeting. The probability that the FOMC will take the Fed Funds Target Rate to 5.50% by the end of 2006 fell to 47% some time after this morning's release of the Consumer Price Index (CPI) figures for July.


Summary of The Latest Prime Rate Forecasts:

• Current odds that the Prime Rate will rise
  to 8.50% on September 20^TH, 2006: 22%
  
• Current odds that the Prime Rate will rise
  to 8.50% by the end of the year: 47%
  
  
• NB: Prime Rate = (The Fed Funds Target Rate + 3)

The current U.S. Prime Rate is 8.25%.

The odds related to the pricing on Fed Funds Futures contracts -- widely accepted as the best predictor of future monetary policy moves by the Fed -- are continually changing, so stay tuned to this blog for the latest odds.

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Probability of A Rate Increase by The End of 2006 Rises to 74% On Retail Sales Report

Yesterday, the Commerce Department released advanced estimates of retail and food services sales for last month: sales were up by 1.4%, while Wall Street forecasters were expecting a rise of 0.8%. The numbers in the latest retail sales report have triggered a shift in the odds related to future rate increases by the Fed, as the Fed may see the July sales figures as an inflation threat.

At my most recent check, the investors who trade in Fed Funds Futures have odds at about 27% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will elect to raise the benchmark Fed Funds Target Rate by 25 basis points to 5.50% at the September 20^TH monetary policy meeting. The probability that the Fed Funds Target Rate will hit 5.50% by the end of 2006 jumped to 74% after the retail sales figures for July were released yesterday.


Summary of The Latest Prime Rate Forecasts:

• Current odds that the Prime Rate will rise
  to 8.50% on September 20^TH, 2006: 27%
  
• Current odds that the Prime Rate will rise
  to 8.50% by the end of the year: 74%
  
  
• NB: Prime Rate = (The Fed Funds Target Rate + 3)

The current U.S. Prime Rate is 8.25%.

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 increase or decrease on Tuesday, August 15, when the government releases the Producer Price Index (PPI) numbers for July, and on Wednesday, August 16, when the Consumer Price Index (CPI) numbers are released.

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FOMC Elects to Pause Raising Rates: Prime Rate Remains at 8.25%

Looks like the most recent predictions were right on the mark: the Federal Open Market Committee (FOMC) of the Federal Reserve met today and decided to leave interest rates alone. That means that the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street Journal® Prime Rate (the national Prime Rate) will remain at 8.25%.

Today's FOMC vote wasn't unanimous: Fifth District Federal Reserve Bank President Jeffrey M. Lacker wanted another 25 basis point hike for the Fed Funds Target Rate today.


Prime Rate Prediction: What's Ahead for the Prime Rate?
The Fed is still worried about inflation, but the FOMC elected to leave rates alone. Why? Yes, the Fed is very keen on controlling inflation, but they also don't want to raise interest rates at a pace that's going to snuff out economic growth and push the U.S. economy into that dark closet called recession. This pause will give the FOMC a chance to see if the 17 straight rate hikes instituted since the summer of 2004 were enough to get inflation under control. It's kinda' like cooking scrambled eggs: you want to turn off the heat before the eggs are done and let the heat from the pan finish the cooking job; keep the heat on for too long and you end up burning the eggs.

Many economists and investors feel that today's Fed action was a "pause" as opposed to a termination of the rate-raising regimen that began 2 years ago. If the economic reports (GDP, CPI, PPI, Employment Situation, etc.) released between now and the next FOMC meeting indicate that inflation still needs taming, then it's a pretty safe bet that the Fed will react by raising rates by at least 25 basis points on September 20^TH. If inflation looks really bad then we may be in for a 50 basis point hike next month.

As of right now, the investors who trade in Fed Funds Futures have odds at about 33% (according to current pricing on contracts) that the FOMC will elect to raise the benchmark Fed Funds Target Rate by 25 basis points to 5.50% at the September 20^TH, 2006 monetary policy meeting.


Simple Summary of the latest Prime Rate Predictions:

• Current odds that the Prime Rate will rise
  to 8.50% on September 20^TH, 2006: 33%
  
• Current odds that the Prime Rate will rise
  to 8.50% by the end of the year: 53%
  
  
• NB: Prime Rate = (The Fed 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 to this blog for the latest odds (TIP: type the URL www.PrimeRatePredictions.com into your web browser as a shortcut to this blog, or, if you prefer, www.PrimeRateForecast.com).


Here's a clip from the press release that was issued by the FOMC this afternoon:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Readings on core inflation have been elevated in recent months, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting."

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Fed Meets In 4 Days; Probability of Another Rate Hike Drops to 16% on Employment Report

The Federal Open Market Committee (FOMC) will convene their next monetary policy meeting on August 8, 2006--4 days from today. The August 8 meeting will be the 5^TH FOMC monetary policy meeting of 2006, and, as of right now, the pricing on Federal Funds Futures contracts puts odds at about 16% that the FOMC will vote to raise the Target Federal Funds Rate--America's benchmark interest rate-- by 25 basis points to 5.50%.

Yesterday, the odds on another rate hike by the Fed jumped to around 43% as economic forecasters predicted that today's Employment Situation Report would show that the U.S. economy added about 150,000 jobs in July. However, forecasters missed the mark, as this morning's report indicated that the economy added 113,000 non-farm payrolls in July. Furthermore, forecasters we're expecting an unemployment rate of 4.6%, but the today's report returned a rate of 4.8%. The employment numbers for July may just be enough to prompt the Fed to stop raising interest rates--or at least take a break from raising rates--on August 8.


Prime Rate Prediction: The Latest Prime Rate Forecast:

• Current odds that the Prime Rate will rise to 8.50% on August 8, 2006: 16%
  
• NB: Prime Rate = The Fed Funds Target Rate + 3

The odds related to the pricing on 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.

Today's Employment Situation report was the last major economic report before the August 8 FOMC meeting, so, according to the latest odds, the Fed probably won't raise interest rates on Tuesday, and if the Fed decides to forgo a rate increase, then the Prime Rate will remain at the current 8.25%.

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Probability of Another Rate Hike Jumps Back Up to Around 43%

Judging by the numbers is today's economic reports, one might expect the odds on another rate hike by the Fed to decline, but instead, the odds related to the pricing on Fed Funds Futures contracts have jumped back up to around 43%.

The economy continues to show signs of slowing, with lower-than-expected Factory Orders in June, and higher-than-expected claims for unemployment insurance benefits in the week that ended on July 29.

So why have the odds gone up instead of down?

Well, it's all about the Employment Situation report that's going to be released tomorrow, a report that carries a lot of weight with forecasters and investors. The odds on another rate hike have gone up because, as of right now, Wall Street economists are predicting that tomorrow's report will show that around 150,000 jobs were created in July, and if the forecasters get it right, it will translate to an increased likelihood that the Fed will raise rates again, in an effort to keep wage inflation in check.

To give you some more perspective: on July, 7, 2006, the Labor Department reported that the U.S. economy added 121,000 jobs in June, 2006. The last Federal Open Market Committee (FOMC) monetary policy meeting was on June 28-29, so, if the prediction that 150,000 new jobs were created last month holds true, then the FOMC will have witnessed about 271,000 jobs (121K for June + 150K for July) created since their last policy meeting.

In other words, if the jobs prediction turns out to be accurate, then we should expect the odds on another rate hike to rise above the current 43% after the release of the Employment Situation report tomorrow.


Simple Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will rise
  to 8.50% on August 8, 2006: 43%

The odds related to the Fed Funds Futures trade--widely accepted as the best predictor of where the FOMC will take the benchmark Federal Funds Target Rate --are continually changing, so stay tuned to this blog for the latest odds, especially tomorrow after the Labor Department releases the July, 2006 Employment Situation report.


In other interest rate news today, the European Central Bank (ECB) raised its benchmark lending rate by 25 basis points to 3.0%. The Bank of England (BOE) also raised it's benchmark interest rate today, by 0.25 percentage point to 4.75%.

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