Probability of A Rate Cut for The August 7, 2007 FOMC Monetary Policy Meeting Now At 25%

Earlier today, the Federal Reserve released the minutes from the March 21, 2007 Federal Open Market Committee (FOMC) monetary policy meeting. It's worth noting that the Fed hasn't ruled out the possibility of a rate increase at some point down the road, if inflation doesn't abate as expected. Here's a clip from the minutes:

"...The Committee agreed that further policy firming might prove necessary to foster lower inflation, but in light of the increased uncertainty about the outlook for both growth and inflation, the Committee also agreed that the statement should no longer cite only the possibility of further firming. Instead, the statement should indicate that future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information..."

Bottom line: the Fed is likely to remain in wait-and-see mode for some months.

Interest-rate futures traders reacted to the Fed minutes, lowering their expectations that the FOMC will elect to cut short-term rates later this year.

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 25% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Federal Funds Target Rate by 25 basis points at the August 7^TH, 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 May 9^TH FOMC monetary policy meeting.
  
• Current odds that the Prime Rate will be cut to 8.00% after the June 28^TH, 2007 FOMC monetary policy meeting: 8% (very unlikely)
  
• Current odds that the Prime Rate will be cut to 8.00% after the August 7^TH, 2007 FOMC monetary policy meeting: 25% (unlikely)
  
  
• NB: Prime Rate = (The Federal 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:

• Friday, April 13, 2007: The Labor Department releases the Producer Price Index (PPI) report for March, 2007.
  
• Tuesday, April 17, 2007: The Labor Department releases the Consumer Price Index (CPI) report for March, 2007.

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