Prime Rate: Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 28%

Friday, March 30, 2007

Probability of A Rate Cut for The June 28, 2007 FOMC Monetary Policy Meeting Now At 28%

The core personal consumption expenditures (PCE) price index -- The Fed's preferred inflation gauge -- rose by 2.4% over the last 12 months. The Fed would like to see inflation somewhere between 1% and 2%, so the latest inflation data make a rate cut for this year less likely. Bottom line: the Fed most likely won't even consider cutting short-term interest rates while inflation continues to hover above the 2% mark.

Placing additional inflation pressure on the U.S. economy: the price on a barrel of crude oil for future delivery ended the week up at $65.87.

Here's a clip from testimony made by Fed chief Ben Bernanke before Congress 2 days ago:

"...Core inflation, which is a better measure of the underlying inflation trend than overall inflation, seems likely to moderate gradually over time. Despite recent increases in the price of crude oil, energy prices are below last year’s peak. If energy prices remain near current levels, greater stability in the costs of producing non-energy goods and services will reduce pressure on core inflation over time. Of course, the prices of oil and other commodities are very difficult to predict, and they remain a source of considerable uncertainty in the inflation outlook..."

The Latest Odds

As of right now, Fed Funds Futures traders have odds at around 28% (according to current pricing on contracts) that the FOMC will elect to lower the benchmark Fed Funds Target Rate by 25 basis points at the June 28^TH, 2007 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

In all likelihood, the Prime Rate will remain at the current 8.25% after the May 9^TH FOMC monetary policy meeting.
Current odds that the Prime Rate will be cut to 8.00% after the June 28^TH, 2007 FOMC monetary policy meeting: 28% (unlikely)
NB: Prime Rate = (The Federal Funds Target Rate + 3)

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. Odds may experience a significant shift on the release of the following economic report: