Prime Rate

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

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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