Odds On A Prime Rate Increase for August 8 Drop to 44% on Release of FOMC Minutes

Earlier today, the Federal Open Market Committee (FOMC) of the Federal Reserve released the minutes from the June28-29, 2006 monetary policy meeting. Here are a couple of notable clips from those minutes:

"...All meeting participants expressed concern about recent elevated readings on core inflation. A key issue was the extent to which this spring's increase in inflation reflected transitory or persistent influences. Many noted that a number of factors were temporarily boosting inflation. The pass-through of the substantial rise in energy prices could account for a considerable part of the step-up in core inflation in recent quarters. In addition, rising rents had been boosting the cost of shelter and so contributing to the increase in core inflation. However, energy prices were expected to level out, and rents, while difficult to forecast, were viewed by some participants as likely to decelerate in coming quarters. The moderation in the economic expansion was expected to prevent pressures on resource utilization from intensifying. In sum, with inflation expectations contained and unit labor costs held down by ongoing gains in productivity and modest advances in compensation, inflation was seen by most participants as likely to edge down..."

"...All Committee members agreed that raising the target for the federal funds rate 25 basis points, to 5-1/4 percent, at this meeting was appropriate given the recent readings on inflation and the associated deterioration in the inflation outlook. Such an action would also help preserve the decline in inflation expectations that had occurred over the intermeeting period and which appeared to be conditioned on an outlook for a policy firming. Characterizing the resulting stance of policy was quite difficult in the view of most members; those who did venture a judgment saw the stance as ranging from modestly restrictive to somewhat accommodative. Many members noted that significant uncertainty accompanied the appropriate setting of policy going forward, and one indicated that the decision to raise the target federal funds rate at this meeting was a close call..."

According to current pricing on Fed Funds Futures contracts, the odds on another 25 basis point (0.25 percentage point) increase to the benchmark Fed Funds Target Rate for August 8^TH are at around 44% as a result today's release of FOMC minutes. The economy is showing clear signs of slowing, and many central bankers, including Fed Chairman Bernanke, have expressed optimism about the outlook for inflation.

So, basically, the FOMC will watch the government reports on the economy closely, and may choose to pause their rate-raising regimen on August 8^TH if they are comfortable with the numbers.


Prime Rate Prediction: The Latest Prime Rate Forecast:

• Current odds that the Prime Rate will rise
  to 8.50% on August 8, 2006: 44%
  

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 stop by this blog often to get the latest odds.

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