Prime Rate Increase on June 29 Still Fully Expected; Odds On Another Increase on August 8th Now @ 88%

Earlier today, the U.S. New Home Sales report for May, 2006 was released by the U.S. Commerce Department and the U.S. Department of Housing and Urban Development. Most private and public-sector economists, academics and investors were expecting a decline in new home sales for May, but instead the government reported a 4.6% rise above the numbers from April, 2006.

Everyone--well, everyone who watches interest rates--is trying to figure out when the Fed will end the rate-raising regimen that began in the summer of 2004. Does a relatively hot housing market mean that the Fed is more likely to raise rates at least 2 more times before stopping? You bet! The next two Federal Open Market Committee (FOMC) monetary policy meetings are scheduled to take place on June 28-29, and August 8, 2006. As of right now, chances are we'll have a national Prime Rate of 8.5% when the August 8 meeting adjourns.


The Latest Forecast for The Prime Rate

According to current pricing on Fed Funds Futures contracts, investors are still 100% certain that the FOMC will vote to raise the benchmark Fed Funds Target Rate to 5.25% on June 29. The odds on another 25 basis point increase when the FOMC meets on August 8 have jumped from 75%, to 88%, mainly in response to the numbers in today's new home sales report.

Here's a simple summary of the latest Prime Rate predictions:

• Current odds that the Prime Rate will rise
  to 8.25% on June 29, 2006: 100% (certain)
  
  
• Current odds that the Prime Rate will rise
  to 8.50% on August 8, 2006: 88%

Of course, the U.S. Prime Rate can be expressed as:

Prime Rate = (The Fed Funds Target Rate + 3)

Right now, with many Fed officials having voiced concerns about inflation, there's actually a 12% chance--according to current pricing on Fed Funds Futures contracts--that the FOMC will elect to raise the Fed Funds Target Rate by 50 basis points on June 29. But, realistically, a 50 basis point hike is not very likely, as such an aggressive move by the FOMC would mean an increased risk of sending the U.S. economy into recession, and nobody wants that.

Tomorrow, the National Association of Realtors will release their report on Existing Home Sales for May, 2006, and the numbers from tomorrow's report may cause the odds from the Fed Funds Futures trade to shift, so stay tuned!

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