Probability of A Rate Increase for Next Month Drops to 22% On Encouraging Inflation Data

Is 17 the magic number? Maybe. According to this week's government reports on wholesale and consumer prices, the heavy sword of 17-straight interest rate hikes may have finally brought the inflation dragon to its knees. The encouraging numbers from this week's reports have led to a shift in the pricing on Fed Funds Futures contracts.

At my most recent check, the investors who trade in interest rate futures have odds at about 22% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will elect to raise the benchmark Fed Funds Target Rate by 25 basis points to 5.50% at the September 20^TH monetary policy meeting. The probability that the FOMC will take the Fed Funds Target Rate to 5.50% by the end of 2006 fell to 47% some time after this morning's release of the Consumer Price Index (CPI) figures for July.


Summary of The Latest Prime Rate Forecasts:

• Current odds that the Prime Rate will rise
  to 8.50% on September 20^TH, 2006: 22%
  
• Current odds that the Prime Rate will rise
  to 8.50% by the end of the year: 47%
  
  
• NB: Prime Rate = (The Fed Funds Target Rate + 3)

The current U.S. Prime Rate is 8.25%.

The odds related to the pricing on Fed Funds Futures contracts -- widely accepted as the best predictor of future monetary policy moves by the Fed -- are continually changing, so stay tuned to this blog for the latest odds.