Prime Rate

also known as the Fed, National or United States Prime Rate,
from the interest-rate specialists at www.FedPrimeRate.comSM

Tuesday, August 08, 2006

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 JournalĀ® 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 20TH. 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 20TH, 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 20TH, 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."

Labels: , , ,

>  SITEMAP  <

Links to this post:

Create a Link

<< Home





FedPrimeRate.com
Entire Website © 2017 FedPrimeRate.comSM


Information in this website is provided for educational purposes only. The owners of this website
make no warranties with respect to any and all content contained within this website. Consult a
financial professional before making important decisions related to any investment or loan
product, including, but not limited to, business loans, personal loans, education loans, first
or second mortgages, credit cards, car loans or any type of insurance.