Third FOMC Meeting of 2007 Adjourned: The Prime Rate Holds at 8.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its third monetary policy meeting of 2007, and, in keeping with the latest forecast, the FOMC has 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%.

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 slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters.

Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments 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; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh..."

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 15% (according to current pricing on contracts) that the FOMC will choose 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 June 28^TH, 2007 FOMC monetary policy meeting.
  
• Current odds that the Prime Rate will be cut to 8.00% after the August 7^TH, 2007 FOMC monetary policy meeting: 15% (very 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, May 11, 2007: The Labor Department releases the Producer Price Index (PPI) report for March, 2007.
  
• Tuesday, May 15, 2007: The Labor Department releases the Consumer Price Index (CPI) report for March, 2007.

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