Prime Rate Increase Still Very Likely On March 28TH, Despite Mixed Signals

Despite mixed signals from the latest government data on the economy, most economists, bankers and investors are still confident that another 25 basis point (0.25 percentage point) increase to the Federal Funds Rate is coming when the FOMC meets on March 28^TH, 2006 (if the Fed Funds Rate goes up by 25 basis points on March 28^TH, then the U.S. prime rate [WSJ prime rate] will also rise by 25 basis points).

Right now, the economy is doing OK, and if the economy continues to do well, then The FOMC will definitely raise rates on March 28^TH so as to keep inflation in check. Unemployment is low, and, according to recent comments made by Dallas Federal Reserve Bank President Richard Fisher, the U.S. economy is on pace to grow by 4% or more this quarter.

The Fed has also been worried about the price of crude oil. Crude oil for future delivery started to get cheaper earlier this week, but recent violence in both Nigeria and Saudi Arabia (both countries export light sweet crude for the most part, the type of crude oil that is easiest to turn into gas and diesel fuel, which makes it the most valuable type of crude oil) have caused the price on crude to shoot back up above $62 per barrel. Political tensions in both Africa and The Middle East probably aren't going to disappear overnight, so the price on crude may remain high for some time, and the high cost of energy may "pass through"--as The Fed likes phrase it--and cause general prices increases for both consumers and producers: a.k.a. inflation.

The folks who trade is Fed Funds Futures still have odds @ 98% (according to current pricing) that The Fed will raise rates by 0.25 percentage points on March 28^TH, and odds on another quarter point increase by The Fed @ the following FOMC meeting that's set to take place on May 10^TH, 2006 have gone from 71% to 76%. In other words, according to current pricing on Fed Funds Futures, we'll probably have a national prime rate of 8% after May10^TH, 2006.


The current published Wall Street Journal® prime rate (U.S. prime rate) is 7.5%, and an increase to 7.75% is very likely on March 28^TH, 2006.

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Minutes From The January 31, 2006 FOMC Meeting Were Released Today; Rate Increase Likely @ The End of March

The minutes from the January 31, 2006 Federal Open Market Committee (FOMC) meeting were released earlier today. Here's a snippet from those minutes:

"...In the Committee's discussion of monetary policy for the intermeeting period, all members favored raising the target federal funds rate 25 basis points to 4-1/2 percent at this meeting. Although recent economic data had been uneven, the economy seemed to be expanding at a solid pace. Members were concerned that, even after their action today, possible increases in resource utilization and elevated energy prices had the potential to add to inflation pressures. Although the stance of policy seemed close to where it needed to be given the current outlook, some further policy firming might be needed to keep inflation pressures contained and the risks to price stability and sustainable economic growth roughly in balance. In the view of some members, the possibility of additional policy moves was reinforced by readings on core inflation and inflation expectations that were somewhat higher than was desirable over the long run. However, all members agreed that the future path for the funds rate would depend increasingly on economic developments and could no longer be prejudged with the previous degree of confidence..."

According to the latest economic indicators, the economy is doing well; crude oil prices are on the rise again, and with The Fed concerned about inflation, economists, bankers and investors are all betting that at least one more 0.25 percentage point increase to The Federal Funds Rate is coming when The FOMC meets on March 28, 2006. (that would, of course, translate to a 0.25 percentage point increase to the U.S. prime rate, a.k.a. the published Wall Street Journal® prime rate.)

The folks who trade in Fed Funds Futures are now predicting (according to current pricing) a 98% chance that The FOMC will raise The Fed Funds Rate by another 25 basis points (0.25 percentage points) when The FOMC meets at the end of March.

The March 28^TH FOMC meeting will be the second FOMC meeting for 2006. The third FOMC meeting is scheduled to take place on May 10, 2006, and Fed Funds Futures traders are now predicting a 71% chance that The FOMC will raise the Fed Funds Rate by yet another 25 basis points at the May 10 meeting.

Economists from Citigroup Global Markets are now predicting that The FOMC will raise The Fed Funds Rate by a quarter point at each of the next 2 FOMC meetings, which, according to this estimate, would translate to a prime rate of 8% after the FOMC meets on May 10, 2006.

Economists @ Bear Stearns & Co. are now predicting that The FOMC will raise The Fed Funds Rate by 25 basis points at each of the next 3 FOMC meetings, which, according to this prediction, would translate to a prime rate of 8.25% after the June 28-29 FOMC meeting.

The odds that have been referenced in this blog entry change on a regular basis, so stay tuned for the latest odds.


The current U.S. prime rate (WSJ prime rate) is 7.5%, and a jump to 7.75% is very likely on March 28, 2006.

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Fed Chief Ben Bernanke Speaks To Congress

Dr. Ben Bernanke, the new Chairman of The Federal Reserve, made statements before the House Financial Services Committee yesterday in his first policy report to Congress as The Fed chief. In his statement, Bernanke said:

"...In the announcement following the January 31 meeting, the Federal Reserve pointed to risks that could add to inflation pressures. Among those risks is the possibility that, to an extent greater than we now anticipate, higher energy prices may pass through into the prices of non-energy goods and services or have a persistent effect on inflation expectations. Another factor bearing on the inflation outlook is that the economy now appears to be operating at a relatively high level of resource utilization. Gauging the economy's sustainable potential is difficult, and the Federal Reserve will keep a close eye on all the relevant evidence and be flexible in making those judgments. Nevertheless, the risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately--in the absence of countervailing monetary policy action--to further upward pressure on inflation. In these circumstances, the FOMC judged that some further firming of monetary policy may be necessary, an assessment with which I concur...

...Although the outlook contains significant uncertainties, it is clear that substantial progress has been made in removing monetary policy accommodation. As a consequence, in coming quarters the FOMC will have to make ongoing, provisional judgments about the risks to both inflation and growth, and monetary policy actions will be increasingly dependent on incoming data..."

He said a lot more in his testimony to Congress, but didn't give any obvious hints about The Federal Open Market Committee's (FOMC) next move related to interest rates (The FOMC is the body within The Federal Reserve system that makes decisions about interest rates. As The Chairman of The FOMC, Ben Bernanke has the final word about interest rates when the FOMC meets to determine whether key banking rates should be raised, lowered or kept as they are. The FOMC meets 8 times per calendar year.)

Is another 0.25 percentage point increase to the prime rate coming after the next FOMC meeting? It's too soon to say for sure, but as of right now, the U.S. economy is looking rather warm, with low unemployment and a recent government retail sales report for January, 2006 that blew away economists' expectations. Over the next few weeks, If the data that The Fed monitors indicate that the economy is still doing great, then another interest rate hike should be expected on March 28, as the Fed will take measures to curb inflation (The Fed will be paying particular attention to the personal consumption expenditures price index.)

For more perspective, consider this: the folks who trade in Federal Funds Futures are now predicting @ almost 100% (based on current pricing) that The Fed will raise The Federal Funds Rate by another 0.25 percentage points at the March 28, 2006 FOMC meeting (this would translate to a 0.25 percentage point increase to the Wall Street Journal Prime Rate [a.k.a. the U.S. or national prime rate].)


Stay tuned for more prime rate news. The current WSJ Prime Rate (U.S. prime rate) is 7.5%.

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Fed Funds Futures Traders Are Betting On A Prime Rate Increase At The End of March

The folks who trade in Fed Funds Futures are now predicting a 94% chance that The Federal Open Market Committee (FOMC) will raise The Federal Funds Rate by another 25 basis points (0.25 percentage points) when The FOMC meets on March 28, 2006 (this, of course, would translate to a 0.25 percentage point increase to the Wall Street Journal Prime Rate [a.k.a. The U.S. Prime Rate].)

The March 28, 2006 FOMC meeting will be the second FOMC meeting for 2006 (the first occurred on January 31, 2006.) The third FOMC meeting for 2006 is set to occur on May 10, 2006, and Fed Funds Futures traders are now predicting a 62% chance that The FOMC will raise the Fed Funds Rate by yet another 25 basis points at the May 10 meeting.

The above referenced odds change on a regular basis (depending on myriad economic indicators) so stay tuned for the latest odds.

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Notable Comments Made By Cleveland Fed Reserve Bank President Sandra Pianalto Today

Sandra Pianalto, who is The President of The Cleveland Federal Reserve Bank, and who is also a voting member of the Federal Open Market Committee (FOMC) this year, had some interesting things to say in a speech she made in front of The Cleveland Association for Business Economics (CABE) today. Here's a snippet from today's speech:

"Now, it is true that the advance estimate for fourth-quarter GDP growth was only 1.1 percent. Some may interpret this weak performance as a sign that the energy shocks may have finally taken their toll. However, we should remind ourselves that these are preliminary numbers. Third-quarter GDP growth was substantially revised upward, so we may learn in a few weeks that fourth-quarter growth was not quite as weak as the initial estimate indicates.

We should also remember that it is fairly common to miss on forecasts of quarter-to-quarter economic performance. For instance, it would not surprise me too much to look back and see that some of the growth we thought would occur in the final three months of last year was actually spread across the third quarter of 2005 - when GDP growth was stronger than expected - and the first quarter or two of this year.

Please understand that I am not suggesting we should be complacent about the weak statistic for fourth-quarter growth. I will be watching the incoming data very carefully over the next several months. In fact, the early data for January have been reasonably good.

Assuming the preliminary fourth-quarter report holds up, though, GDP still grew last year by 3.5 percent. For the year as a whole, it is clear that employment growth accelerated, business fixed investment was relatively strong, and core inflation remained subdued.

What about the outlook for 2006? Most forecasters are expecting another solid performance. Forecasts published by Blue Chip Economic Indicators, the Congressional Budget Office, and NABE economists generally call for real GDP to expand by roughly 3-1/4 to 3-1/2 percent this year. Housing investment is generally expected to slow, while business fixed investment is expected to increase. These forecasts call for interest rates, the unemployment rate, and core inflation to remain steady. I know that at your meeting last month, your three forecasters presented views that were largely the same."

So, even though preliminary data indicate that the economy didn't grow that much in the forth quarter of last year, the economy is still looking pretty strong according to the data that have so far been available for January of 2006.

If the economy is in fact growing and continues to grow in February and March, then an interest rate increase should be expected when The FOMC meets at the end of March.

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Chicago's Federal Reserve Bank President Says Interest Rates May Need To Go Up Again

Speaking at a meeting of The Risk Management Association of Chicago yesterday, Chicago Federal Reserve Bank President Michael Moskow, who this year will be a non-voting member of the Federal Open Market Committee (FOMC), said:

"Even with the funds rate in the range of neutral, further changes in policy may be appropriate. My view is that inflation will likely remain contained. Futures markets are not looking for energy prices to move appreciably higher. And, importantly, solid underlying trends in productivity should keep overall production costs in check. But, as I mentioned earlier, there are risks to the inflation outlook—namely, the potential for energy cost pass-through, pressures from increases in resource utilization, or rising inflationary expectations. And with inflation near the upper end of my comfort zone, an unexpected increase in inflation would be a serious concern, while a decline in inflation would be beneficial. My views about policy will depend importantly on how various cost factors play out and affect the outlook for inflation. And if inflation or inflation expectations were to rise persistently, then policy clearly would have to be tightened further. Of course, other events could transpire that result in prospects for inflation and growth that would be consistent with a less-firm policy stance."

So, basically, though the benchmark Fed Funds Rate is in now within the "neutral range"--neutral being a rate that neither encourages nor curtails U.S. economic growth--The FOMC may feel a need to raise rates again in March if The Committee believes that inflation is rising at an unacceptable pace. The Fed will be paying close attention to items like the unemployment rate, energy prices (crude oil, natural gas, etc.) and the personal consumption expenditures price index. If unemployment remains low, crude prices high and the overall economy appears to be doing great, then another 25 basis point (0.25 percentage point) increase to the Fed Funds Rate may be coming at the end of next month (this, of course, would translate to a 0.25 percentage point increase to The Wall Street Journal Prime Rate.)

Click here to view Michael Moskow's speech in full.

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Next Federal Open Market Committee (FOMC) Meeting Has Been Extended

The next meeting of The Federal Open Market Committee (FOMC), which is scheduled for March 28, 2006, has been extended to cover 2 days: the meeting will begin in the afternoon of March 27 and will continue on March 28, 2006. Reason: The next meeting will be Dr. Ben Bernanke's first as Chairman of The FOMC, so more time has been allotted.

A statement from The FOMC about interest rates will be released by the end of the business day on Tuesday, March 28, 2006, so check back here at that time for the latest prime rate news.

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