Odds On A June 29 Prime Rate Increase Rise to 74% In Response to Today's Comments by Fed Chief Bernanke

Believe it or not, there's been yet another significant shift to the odds on another Prime Rate hike after the Federal Open Market Committee (FOMC) meets on June 29, 2006.

Speaking at the International Monetary Conference today, Fed Reserve Chairman Dr. Ben Bernanke made the following comments (snippets below):

"...Consumer price inflation has been elevated so far this year, due in large part to increases in energy prices. Core inflation readings--that is, measures excluding the prices of food and energy--have also been higher in recent months. While monthly inflation data are volatile, core inflation measured over the past three to six months has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth. For example, at annual rates, core inflation as measured by the consumer price index excluding food and energy prices was 3.2 percent over the past three months and 2.8 percent over the past six months. For core inflation based on the price index for personal consumption expenditures, the corresponding three-month and six-month figures are 3.0 percent and 2.3 percent. These are unwelcome developments..."

"...With the economy now evidently in a period of transition, monetary policy must be conducted with great care and with close attention to the evolution of the economic outlook as implied by incoming information. Given recent developments, the medium-term outlook for inflation will receive particular scrutiny. There is a strong consensus among the members of the Federal Open Market Committee that maintaining low and stable inflation is essential for achieving both parts of the dual mandate assigned to the Federal Reserve by the Congress. In particular, the evidence of recent decades, both from the United States and other countries, supports the conclusion that an environment of price stability promotes maximum sustainable growth in employment and output and a more stable real economy. Therefore, the Committee will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained..."

Significant comments? You bet! Because, even though Dr. Bernanke acknowledges that the U.S. economy is slowing, his concerns about the Consumer Price Index (CPI) and the Core Personal Consumption Expenditures Price Index nevertheless may prompt the Fed chief to raise the benchmark Fed Funds Target Rate again on June 29. The decision about interest rates won't be an easy one, because raising interest rates while the economy is slowing has the potential of cooling the economy too much, and nobody wants a <gulp> recession.

Bernanke's comments had a predictable effect on the New York stock markets today, as all 3 major indices retreated, with the Dow Jones Industrial Average (DJIA) losing 199.15 points (crude oil prices contributed to today's bearishness, but I think it's safe to write that Bernanke's comments played the major role.)

The Latest Prime Rate Predictions

As you might have guessed, today's comments by Ben Bernanke have caused Fed Funds Futures traders to react; traders now have odds (according to current pricing) @ 74% that the FOMC will vote to raise the benchmark Fed Funds Target Rate from the current 5.00%, to 5.25% at the June 28-29 FOMC monetary policy meeting. Prior to today's comments by Dr. Bernanke, odds were at 48%.

If the FOMC votes to raise the Fed Funds Target Rate to 5.25% on June 29, then the U.S. Prime Rate (Wall Street JournalĀ® Prime Rate) will jump from the current 8.00%, to 8.25%.

Rule of thumb reminder:

The U.S. Prime Rate = (The Fed Funds Target Rate + 3)

The odds related to the Fed Funds Futures trade--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.

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