The Odds On Another Prime Rate Increase Hit 65%

Yesterday, the Department of Labor released the Producer Price Index (PPI) numbers for June, 2006. The PPI report showed that wholesales prices rose at a rate that many economists weren't expecting--0.5%--with higher food and energy prices leading the charge against producers' wallets. The numbers in today's Consumer Price Index (CPI) report were closer to economists' expectations, but when the investors who trade in interest rate futures digested both the PPI and the CPI numbers, the odds on another quarter-point rate increase for August 8^TH rose as high as 85%.

Bernanke Expects Inflation to Ease

After Fed Chairman Bernanke spoke before the Senate Banking Committee today, the odds on another interest rate increase for August 8^TH fell to 65% (according to my most recent price check on Fed Funds Futures contracts.) Dr. Bernanke said that he expects core inflation to ease in coming months as the U.S. economy slows. Thomas Hoenig, the President of the Kansas City Federal Reserve Bank, also made positive comments today related to the forecast for inflation.


Prime Rate Prediction: The Latest Prime Rate Forecast:

• Current odds that the Prime Rate will rise
  to 8.50% on August 8, 2006: 65%
  
• NB: Prime Rate = The Fed Funds Target Rate + 3

The odds related to the pricing on 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 Prime Rate blog for the latest odds. Odds may shift tomorrow afternoon after the FOMC releases the minutes from the June 28-29 FOMC monetary policy meeting.