Prime Rate Increase Today: The Prime Rate Is Now 8.25%

Ladies and gents: borrowing just got more expensive. In accordance with all the reliable interest rate predictions and forecasts, the Federal Open Market Committee (FOMC) of The Federal Reserve has just raised its target for the benchmark Federal Funds Rate by 25 basis points (0.25 percentage point) to 5.25%. Therefore, as of this afternoon, the de facto Wall Street JournalĀ® Prime Rate (the U.S. Prime Rate) is now 8.25%. Many American banks have already issued a press release announcing that their prime lending rate has increased from 8.00% to 8.25%, including:

• The Bank of America*
• HSBC*
• Northern Trust*
  
• PNC*
• Harris N.A.*
  
• Dollar Bank*
  
• National City*
  
• Comerica Bank*
  
• Wells Fargo*
  
• KeyCorp*
• U.S. Bancorp*
• M&T Bank*
• SunTrust*
• Wachovia*
• Sky Financial*

The Fed has raised it's target for the Fed Funds Rate by a quarter-point 17 times in a row since June, 2004, and we may be in for another quarter-point increase after the FOMC adjourns their monetary policy meeting on August 8, if, at that time, the Fed isn't comfortable with the pace of inflation.


Prime Rate Prediction: Forecast for The Prime Rate

According to the latest and most authoritative data from the government, U.S. GDP rose by a strong 5.6% in the first-quarter. Nevertheless, consistently high crude oil prices and the higher cost of borrowing have had a cooling effect on the U.S. economy, and this means that the Fed is somewhat less likely to raise rates again in the future. Investors on Wall Street were quite pleased with the language in today's press release, as evidenced by the strong gains made by the 3 major indices today, with the Dow Jones Industrial Average (DJIA) gaining a healthy 217 points.

As of right now, Fed Funds Futures traders have odds at about 62% (according to current pricing on contracts) that the FOMC will elect to raise the benchmark Fed Funds Target Rate by another 25 basis points to 5.50% at the August 8 monetary policy meeting. Prior to today's rate increase, the odds on another quarter-point rate hike on August 8^TH were at about 83%.

Simple Summary of the latest Prime Rate predictions:

• Current odds that the Prime Rate will rise
  to 8.50% on August 8, 2006: 62%
  

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, especially when The FOMC releases the minutes from today's meeting, which should happen on July 20^TH, 2006.


Here's a snippet from the press release that was issued by the Fed earlier this afternoon:

"The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5-1/4 percent.

Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.

Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Jeffrey M. Lacker; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen."

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