United States Prime Rate: June 2007

Fourth FOMC Meeting of 2007 Adjourned: The U.S. Prime Rate Holds at 8.25%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its fourth 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 national 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 appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, 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, the investors who trade in Fed Funds Futures have odds at 15% (according to current pricing on contracts) that the FOMC will opt to lower the benchmark Federal Funds Target Rate by 25 basis points at the December 11^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 August 7^TH, September 18^TH and October 31^ST FOMC monetary policy meetings.
Current odds that the Prime Rate will be cut to 8.00% after the December 11^TH, 2007 FOMC monetary policy meeting: 15% (very unlikely)
NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Federal 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.

Labels: fomc, fomc_meeting, odds, prime_rate_forecast

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Probability of A Rate Cut for The October 31, 2007 FOMC Monetary Policy Meeting Now At 10%

The Dow Jones Industrial Average (DJIA) lost almost 1% today (129.79 points) as many investors who were still daydreaming about the possibility that the Fed will cut short-term interest rates this year woke up. Fact is, the writing has been on the wall for some time now: Fed boss Ben Bernanke has been talking about the potential for inflation to rise above the Fed's comfort zone for some months now. Just yesterday, Dr. Bernanke made the following remarks about inflation:

"...As expected, we have also seen a gradual ebbing of core inflation, although its level remains somewhat elevated. Despite recent increases in the prices of crude oil and gasoline, energy prices overall are below last year’s peak; the rate of increase in shelter costs seems likely to slow, although the timing remains uncertain; and long-run inflation expectations, as derived from both surveys and market-based measures of inflation compensation, have remained contained. However, although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside. In particular, the continuing high rate of resource utilization suggests that the level of final demand may still be high relative to the underlying productive capacity of the economy..."

A key report on U.S. productivity and labor costs released today acted as an extra splash of cold water for investors. For Q1, 2007, the non-farm productivity gain was revised downward to 1.0%, and the unit labor costs figure was revised up to 1.8%.

The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at 10% (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 October 30-31^ST, 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, August 7^TH and September 18^TH FOMC monetary policy meetings.
Current odds that the Prime Rate will be cut to 8.00% after the October 31^ST, 2007 FOMC monetary policy meeting: 10% (very unlikely)
NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Federal 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.

Labels: odds, prime_rate_forecast

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Prime Rate Very Likely To Remain at 8.25% Through At Least September

A pair of key economic reports were released today: the Employment Situation Report for May and the Institute for Supply Management's purchasing manager's index (PMI). The data in both reports indicate that the U.S. economy is doing OK, which, in turn, means that the Fed is likely to keep short-term interest rates at their current level for the rest of the year.

According to the May Employment Situation Report, 157,000 new jobs were added to the American workforce last month (Wall Street forecasters were expecting about 135,000 new jobs), and the unemployment rate held steady at 4.5%.
The PMI for May was 55% (any figure above 50% indicates that the manufacturing sector of the U.S. economy is expanding.)

The Latest Odds

As of right now, the investors who trade in Fed Funds Futures have odds at 0% (according to current pricing on contracts) that the FOMC will opt to lower the benchmark Federal Funds Target Rate by 25 basis points at the September 18^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, August 7^TH and September 18^TH FOMC monetary policy meetings.
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.

Labels: odds, prime_rate_forecast

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FOMC Meeting Schedule (Tentative) for 2008

Earlier today, The Federal Open Market Committee (FOMC) released its tentative monetary policy meeting schedule for 2008. The FOMC doesn't always stick to the exact dates on the schedule (hence tentative), but they do always meet at least 8 times per calendar year.

Why is this schedule important to you? Because it's at these monetary policy meetings that The FOMC votes on whether to raise, lower or make no changes to The Fed Funds Target Rate, and when the Fed Funds Target Rate changes, the U.S. Prime Rate (also known as the fed, national or WSJ Prime Rate) will also change.

Here's the tentative schedule for 2008: