Fed Leaves Short-Term Rates Alone: Prime Rate Remains at 8.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned the eighth and last monetary policy meeting of 2006, and, in keeping with the latest odds and predictions, the FOMC voted to leave short-term interest rates at their current level. Therefore, the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street Journal® Prime Rate (also known as the U.S. or Fed Prime Rate) will remain at the current 8.25%.

The Fed has voted to keep short-term rates unchanged four times in a row now, and, for the fourth FOMC meeting in a row, Fifth District Federal Reserve Bank President Dr. Jeffrey M. Lacker was the sole dissenter: Dr. Lacker once again voted for a 25 basis point (0.25 percentage point) increase for the Fed Funds Target Rate.

Here's a clip from the press release that was issued by the FOMC earlier 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 substantial cooling of the housing market. Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters.

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."

The Latest Odds: What's Ahead for The Prime Rate?

As of right now, Fed Funds Futures traders have odds at around 28% (according to current pricing on contracts) that the FOMC will elect to lower the Federal Funds Target Rate by 25 basis points at the March 21^ST, 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 January 31^ST FOMC monetary policy meeting.
  
• Current odds that the Prime Rate will be cut to
  8.00% on March 21^ST, 2007: 28% (not likely)
  
• 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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