Prime Rate

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

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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