Prime Rate

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

Thursday, October 26, 2006

Odds On A Rate Hike for January 31 Drop to 4% On New Home Sales Report

Planning on buying a new home? Well, in many regions across the U.S., it's a buyer's market right now. Mortgage rates are still low, inventories are high, and home prices are falling.

Today, the Commerce Department released the September New Homes Sales report. 1,075,000 new homes were sold last month; compare that to the September, 2005 figure: 1,253,000. More significantly, the median price on a new home last month was $217,100; compare that to the revised September, 2005 figure: $240,400.

Yup: it's a buyer's market all right. But how long will it last? Well, not that long, if I'm reading comments made by former Fed boss Alan Greenspan correctly. In a recent interview with economist Sherry Cooper up in Canada, Greenspan said:

"...I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out. There is a good chance of coming out of this in good shape, but average house prices are likely to be down this year relative to 2005. I don't know, but I think the worst of this may well be over..."

Or maybe Dr. Greenspan is being too optimistic about the housing correction, and the housing sector will continue to decline well into 2007. Some economists are predicting that the housing sector will continue on a downward trend for another 6 to 12 months before bottoming out. Only time will tell.


The Latest Odds

As you might have guessed, investors have reacted to today's housing news. As of right now, the folks who trade in Fed Funds Futures have odds at around 4% (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 at the January 31ST, 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 December 12TH FOMC monetary policy meeting.
  • Current odds that the Prime Rate will rise
    to 8.50% on January 31ST, 2007: 4% (very unlikely)

  • 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. Odds may experience a significant shift on November 14TH, after the Fed releases the minutes from yesterday's monetary policy meeting.

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Wednesday, October 25, 2006

Fed Votes To Leave Interest Rates Alone: Prime Rate Remains at 8.25%

In line with the latest predictions, the Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned their seventh monetary policy meeting of 2006, and elected to leave interest rates at their present level. Therefore, the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street JournalĀ® Prime Rate (the nationwide Prime Rate) will remain at the current 8.25%.

The Fed has voted to leave interest rates unchanged 3 times in a row now, and Fifth District Federal Reserve Bank President Dr. Jeffrey M. Lacker has dissented 3 times in a row as well, voting once again for a 25 basis point (0.25 percentage point) increase for the Fed Funds Target Rate. A suitable moniker for Dr. Lacker: Jeffrey "Inflation Hawk" Lacker.


Prime Rate Forecast: Predictions for the Prime Rate
The Fed is still counting on the cooling economy to help douse the flames of inflation moving forward, so at the December 12 monetary policy meeting -- the last of 2006 -- the group is likely to repeat today's inaction and leave interest rates at their current level.

More evidence that the U.S. economy is waning came in today. The National Association of RealtorsĀ® released the September, 2006 Existing Home Sales report earlier this morning: existing home sales fell by 1.9% to 6,180,000 units last month. That's 14.2% lower than the September, 2005 level.

As of right now, the investors who trade in Fed Funds Futures have odds at around 10% (according to current pricing on contracts) that the FOMC will elect to raise the benchmark Fed Funds Target Rate by 25 basis points at the January 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:
  • In all likelihood, the Prime Rate will remain at the current 8.25% after the December 12TH FOMC monetary policy meeting.
  • Current odds that the Prime Rate will rise
    to 8.50% on January 31ST, 2007: 10% (unlikely)

  • 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. Odds may experience a significant shift when the Fed releases the minutes from today's policy meeting on November 14TH. (TIP: type the easy-to-remember 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 slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, 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; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; 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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Tuesday, October 24, 2006

Fed Decision On Interest Rates Tomorrow: No Change Expected

Later today, the Federal Open Market Committee (FOMC) will convene the seventh monetary policy meeting of 2006, a meeting which will span 2 days. Tomorrow afternoon, the FOMC will announce their decision on interest rates, and it is fully expected that the group will vote to leave interest rates alone. This means the benchmark Fed Funds Target Rate will remain at 5.25%, and the Wall Street Journal Prime Rate (the U.S. Prime Rate) will remain at the current 8.25%.

The next monetary policy meeting, which will be the last of 2006, will take place on December 12, and as of right now, the vast majority of economists and investors are predicting that the Fed will leave rates alone again after the December meeting.

What is the Fed Funds Futures market predicting for tomorrow? Right now, the odds are at a mere 2% (according to pricing on contracts) that the FOMC will vote to lower rates by 25 basis points (0.25 percentage point.) In other words, for tomorrow, a move on interest rates is very unlikely.

Stay tuned: we'll have more odds and analysis after the Fed issues a press release following tomorrow's policy meeting, as is their custom.

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Wednesday, October 18, 2006

The Prime Rate Will Remain At 8.25% for the Foreseeable Future

The Prime Rate won't budge from the current 8.25% any time soon.

The inflation numbers for September are in, and it looks like the slowing U.S. economy hasn't had enough time to force the inflation genie back into the bottle. This means that the Fed isn't going to lower interest rates in the foreseeable future. Bottom line: the current inflationary environment has all but wiped out any hope of a rate cut for January 31, 2007. In fact, as of right now, a small minority of investors are betting that the Fed will raise interest rates by 25 basis points on January 31.

Yesterday, the Producer Price Index (PPI) report for September showed that wholesale prices minus food and energy rose by 0.6%, while economists were expecting a 0.2% rise. And though today's Consumer Price Index (CPI) report showed that consumer prices declined in general -- thanks to lower crude oil prices -- core inflation from September '05 to September '06 rose at an annual rate of 2.9%, and that's significantly above the Fed's comfort zone.

Last, but not least, Housing Starts increased by 5.9% last month, which may mean that the housing market isn't as weak as many economists heretofore believed it to be.

The U.S. Prime Rate isn't going to budge any time soon, certainly not after next week's Federal Open Market Committee (FOMC) monetary policy meeting. Plan your finances accordingly!


The Latest Odds
As of right now, the investors who trade in Fed Funds Futures have odds at about 6% (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 January 30-31, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:
  • In all likelihood, the Prime Rate will remain at the current 8.25% after the next two FOMC monetary policy meetings (October 24TH and December 12TH)
  • Current odds that the Prime Rate will rise
    to 8.50% on January 31ST, 2007: 6% (very unlikely)

  • 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.

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Wednesday, October 11, 2006

Rate Cut for January 31 Now Unlikely

Rate watchers who've been anticipating a rate cut for January, 2007 aren't going to be pleased with today's news: looks like the Prime Rate will remain at the current 8.25% beyond the January 30-31 Federal Open Market Committee (FOMC) monetary policy meeting.

Earlier today, the Federal Reserve released the minutes from the September 20 FOMC monetary policy meeting. Here's a clip:

"...In view of the most recent information on the economy, members agreed that it was appropriate for the post-meeting statement to characterize economic growth as apparently continuing to moderate. However, in view of still-high energy and other commodity prices and elevated rates of resource utilization as well as recent indications of a possible acceleration in labor costs, members continued to see a substantial risk that inflation would not decline as anticipated by the Committee. Consequently, the Committee agreed that the statement should again cite such risks to inflation and explicitly reference the possibility of additional policy firming..."

Yup, the economy is still on the wane. But many Fed officials are not comfortable with the current pace of inflation, thus reducing the probability that the Fed will lower rates soon. Recently, Federal Reserve Vice Chairman Donald Kohn, Philadelphia Fed President Charles Plosser, Dallas Fed chief Richard Fisher and San Francisco Fed boss Janet Yellen have all expressed concerns about rising prices and inflation in general. And, as you may recall, Fifth District Federal Reserve Bank President Jeffrey Lacker wanted to raise rates by 25 basis points on August 8 and on September 20.


The Latest Odds
As of right now, the investors who trade in Fed Funds Futures have odds at about 6% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to lower the benchmark Fed Funds Target Rate by 25 basis points (to 5.00%) at the January 30-31, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:
  • In all likelihood, the Prime Rate will remain at the current 8.25% after the next two FOMC monetary policy meetings (October 24TH and December 12TH)
  • Current odds that the Prime Rate will be cut
    to 8.00% on January 31ST, 2007: 6% (unlikely)

  • 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 for the latest odds. Odds may experience a significant shift on the release of the following economic reports:

  • Tuesday, October 17, 2006: Labor Department releases the Producer Price Index report for September.
  • Wednesday, October 18, 2006: Labor Department releases the Consumer Price Index report for September.
  • Thursday, October 19, 2006: The Conference Board releases the Leading Economic Indicators report for September.

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Friday, October 06, 2006

Odds Shift On Employment Situation Report: Prime Rate Cut A Bit Less Likely for January 31

Earlier today, the Department of Labor's Bureau of Labor Statistics released the Employment Situation Report for September, 2006. An interesting mix of numbers this time around: the report indicates some weakness, as only 51,000 new jobs were created (prognosticators were predicting 125,000 new jobs), but the report also shows that the unemployment rate dropped from 4.7% to 4.6%, which is pretty clear indication that the U.S. economy is doing A-OK.

The Latest Odds
As of right now, the investors who trade in Fed Funds Futures have odds at about 19% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to lower the benchmark Fed Funds Target Rate by 25 basis points to 5.00% at the January 30-31, 2007 monetary policy meeting. Odds on a rate cut for March 21, 2007 are now at 50% (on the fence.)


Summary of the Latest Prime Rate Predictions:
  • In all likelihood, the Prime Rate will remain at the current 8.25% after the next two FOMC monetary policy meetings (October 24TH and December 12TH)
  • Current odds that the Prime Rate will be cut
    to 8.00% on January 31ST, 2007: 19%
  • Current odds that the Prime Rate will be cut
    to 8.00% by March 21ST, 2007: 50%

  • 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 for the latest odds. Odds may experience a significant shift on the release of the following government reports:

  • Wednesday, October 11, 2006: Fed releases minutes from the September 20 FOMC monetary policy meeting.
  • Tuesday, October 17, 2006: Labor Department releases the Producer Price Index report for September.
  • Wednesday, October 18, 2006: Labor Department releases the Consumer Price Index report for September.
  • Thursday, October 19, 2006: The Conference Board releases the Leading Economic Indicators report for September.

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Thursday, October 05, 2006

The Prime Rate Has Peaked: Odds Now Point to A Possible Rate Cut By Early 2007

The U.S. Prime Rate (WSJ Prime Rate) is currently 8.25%, and it looks like that's as high as it's going to go in 2006.

Higher borrowing costs have helped to cool the economy and tame inflation, so the Fed is not going to raise interest rates again this year. In fact, some investors are now predicting that the Fed is going to lower interest rates as soon as February, 2007, as the housing market is cooling at a pace that may produce a less-than-desirable economic environment in the near future.

So now the 2 big questions are: will the Fed lower short-term borrowing costs in the near future? If so, then when? Predictions aren't going to be too solid right now, as the Fed is still sending mixed signals: Fed chief Ben Bernanke recently acknowledged the slowing housing market, but, on the other hand, Federal Reserve Vice Chairman Donald Kohn recently expressed concern about inflation, and Philadelphia Fed President Charles Plosser today said that the U.S. economy would probably be better off with interest rates at their current level, or higher.

Of course, predictions will become more solid as new government data related to the economy are released in the coming weeks and months.


The Latest Odds
As of right now, the investors who trade in Fed Funds Futures have odds at about 28% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will elect to lower the benchmark Fed Funds Target Rate by 25 basis points to 5.00% at the January 30-31, 2007 monetary policy meeting.


Simple Summary of the Latest Prime Rate Predictions:
  • In all likelihood, the Prime Rate will remain at the current 8.25% after the next two FOMC monetary policy meetings (October 24TH and December 12TH)
  • Current odds that the Prime Rate will be cut
    to 8.00% on January 31ST, 2007: 28%

  • 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 for the latest odds, especially tomorrow after the Labor Department releases the September, 2006 Employment Situation report.

In other interest rate news, the European Central Bank (ECB) today raised the eurozone's benchmark interest rate from 3.00% to 3.25%. The Bank of England (BOE) also held a monetary policy meeting today, and opted to leave the UK's benchmark rate unchanged at 4.75%.

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