Prime Rate Increase Today: U.S. Prime Rate Is Now 7.75%

Today's rate increase by The Fed comes as no surprise to the business, banking, academic and investment communities, as today's 25 basis point (0.25 percentage point) increase to The Federal Funds Target Rate was fully expected.

The Federal Open Market Committee (FOMC) of The Federal Reserve today voted to raise their Fed Funds Target Rate to 4.75%. Therefore, as of this afternoon, the de facto Wall Street Journal® Prime Rate (the U.S. Prime Rate) is now 7.75%, the highest it's been in 5 years. Many American banks have already issued a press release announcing that their prime lending rate has increased from 7.5% to 7.75%, including:

• The Bank of America*
• The Bank of New York*
• PNC*
• Comerica Bank*
  
• Wells Fargo*
  
• Wachovia*
  
• KeyCorp*
• SunTrust*
  
• U.S. Bancorp*
• Sky Financial Group*
• M&T Bank*
  

What's Ahead for the Prime Rate

Low unemployment coupled with strong economic growth and high energy prices are all placing inflationary pressure on the nation's economy. High energy costs--and, of course, we are talking about crude oil here--continue to threaten to "pass through" and cause a general price increases for both consumers and producers. Right now, NYMEX crude oil for future delivery is at a staggering $65.94 per barrel, and no one knows when the political tensions in the Middle East and Africa are going to simmer down.

Today was Dr. Ben Bernanke's debut as the FOMC boss, so rate watchers, economists, academics, investors--anyone and everyone with an interest in the U.S. economy--are all scrutinizing the press release that was issued by The Fed today with much fervor. Many rate watchers are going to be pleased about the wording in today's release, as the comments contain language that provides some useful insight as to future interest rate decisions that will be made by the FOMC:

"The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives."

Yup, good stuff, because the statement about future policy is virtually identical to the one that can be found in the January 31, 2006 FOMC press release when Alan Greenspan was still calling the shots, and I think lots of folks like the idea that Bernanke is probably making an effort to emulate Dr. Greenspan's approach to U.S. economic stewardship.

We can tell by the above language that if the economy continues to move ahead at a healthy pace, and other factors like low unemployment and high energy prices continue to place inflationary pressure on the economy, then we should expect another 25 basis point increase to the Federal Funds Target Rate after the FOMC adjourns on May 10^th, 2006; a Fed Funds Rate of 5% after May 10^th, 2006, would translate to a national Prime Rate of 8%, because the Prime Rate can be expressed as:

U.S. Prime Rate = The Fed Funds Rate + 3

Prime Rate Prediction: The Latest Odds from Fed Funds Futures Traders

The investors who trade in Federal Funds Futures have shifted the odds--according to current pricing--of another quarter point hike to the Fed Funds Rate following today's statement by The FOMC: odds of another 0.25 percentage point increase have gone from 76% to 90%. So, according to current pricing on Federal Funds Futures, we should expect a U.S. Prime Rate of 8% after the FOMC adjourns on May10^th, 2006.

The odds related to Fed Funds Futures trade 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 April 18^th, 2006.


Here's a snippet from the press release that was issued by The Fed today:

"The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-3/4 percent.

The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace. As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.

The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these 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; Mark W. Olson; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen."

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Decision on Interest Rates Will Be Released Tomorrow; Quarter Point Hike Fully Expected

The Federal Open Market Committee (FOMC) was in session today, but a decision on interest rates won't be released until tomorrow afternoon. The current FOMC session was recently expanded so as to give Fed Chairman Ben Bernanke a little extra time to settle-in as the new FOMC boss. Of course, as you know from recent entries to this blog, a quarter point increase to the key Federal Funds Target Rate is fully expected after the FOMC adjourns tomorrow, which would translate to a 0.25 percentage point increase to the U.S. prime rate (WSJ Prime Rate.)

It's a pretty safe bet that the national Prime Rate will go from the current 7.5% to 7.75% tomorrow.

If you have any loans that are tied to the Prime Rate (i.e. loans with a variable rate), then you may need to make some minor adjustments to your household budget after tomorrow's expected rate hike, as the annual percentage rate (APR) on your variable rate loans and variable rate credit cards will probably rise by 25 basis points (0.25 percentage points) once the ripple effect of tomorrow's national Prime Rate increase has made its way through the nation's banking system.


New Kids Page Created at The Federal Reserve Website

While you're waiting for tomorrow's FOMC decision, check out the new kids page that's been created at the official Federal Reserve website @ http://www.federalreserve.gov/kids/default.htm. Covers just about anything a curious kid might want to know about The Fed, and even includes a cute little quiz (did I just use the word "cute" to describe a page on the Fed Reserve website?)

Here a snippet from today's press release:

"The Federal Reserve Board on Monday launched a new kids web page designed to educate middle school students about the Board of Governors of the Federal Reserve System. The new web page is designed in a user-friendly, question-and-answer format to ensure easy navigation and the ability to learn basic information about the Fed.

The new web page (www.federalreserve.gov/kids/) features information about the history, structure, and primary functions of the Federal Reserve; the Chairman of the Board of Governors; and the structure of Federal Open Market Committee. Other highlights include a kids quiz and links to other valuable resources on the Federal Reserve Board's web site.

'The Federal Reserve has a long history of promoting economic education and financial literacy. This new web page provides younger students with a basic approach to the complexities of the Federal Reserve that is both enjoyable and interesting,' said Federal Reserve Board Governor Mark Olson."

Stay tuned for tomorrow's blog entry.

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Odds on Prime Rate Increases Change After Fed Chief Bernanke Speaks

Federal Reserve Chairman Dr. Ben S. Bernanke made a speech before the Economic Club of New York this past Monday evening, and, as you might expect, the odds on future interest rate increases have changed as a result.

The Latest Odds Related to Future Prime Rate Increases
Investors who trade is Federal Funds Futures still have odds at 100% (according to current pricing) that The Fed will raise the cardinal Fed Funds Rate by 0.25 percentage points (25 basis points) when the Federal Open Market Committee (FOMC) reconvenes next Tuesday (March 28^TH, 2006.) A quarter point hike of The Fed Funds Rate would, of course, cause the U.S. prime rate to increase from the current 7.5% to 7.75%.

The odds on another 25 basis point increase by The Fed @ the following FOMC that's scheduled to take place on May 10^TH, 2006 have gone from 73% to 87%. So, according to current pricing on Federal Funds Futures, we could have a national prime rate of 8% when the May10^TH, 2006 FOMC meeting adjourns.

Most economists are also predicting that The Fed will raise rates 2 more times before ending the rate raising regimen that started in July of 2004 (The FOMC has voted to raise interest rates by a quarter point at every FOMC meeting since July 1, 2004.) Bernanke has indicated that neither the current state of U.S. Treasury bond yields, nor the effect that higher interest rates will have on the nation's housing market are of particular concern.

As long as the critical economic indicators continue to show that the economy is moving forward at a healthy pace, then 2 more quarter point increases should be expected.


The current published Wall Street Journal® prime rate (WSJ prime rate) is 7.5%, and the vast majority of experts from the academic, business and investment communities are predicting that the prime rate will rise to 7.75% when the FOMC meets in a little less than one week (March 28^TH, 2006.)

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The Latest Odds Related to Future Prime Rate Increases

The latest data on the U.S. economy indicate that growth is still moving forward at a good pace. A key report on the nation's employment situation is due to be released on Friday, March 10, and both economists and investors are expecting this report to show that unemployment in the U.S. is still low, and low unemployment will cause The Fed to worry about wage inflation, which in turn increases the likelihood that The Fed will raise rates by another 25 basis points at each of the next 2 Federal Open Market Committee (FOMC) meetings which are scheduled to take place on March 28 and May 10, 2006.

The Latest Odds Related to Future Prime Rate Increases
Investors who trade is Fed Funds Futures now have odds @ a confident 100% (according to current pricing) that The Fed will raise rates by a quarter point on March 28^TH, 2006. Odds on another 25 basis point increase by The Fed @ the following FOMC meeting that's scheduled to take place on May 10^TH, 2006 have gone from 76% to 79%. In other words, according to current pricing on Fed Funds Futures, the U.S. prime rate (WSJ prime rate) will probably be 8% after May10^TH, 2006.


The current published Wall Street Journal® prime rate (U.S. prime rate) is 7.5%, and the consensus throughout the investment and banking communities is that the prime rate will rise to 7.75% when the FOMC meets on March 28^TH, 2006.

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Fed Reserve Vice Chairman Dr. Roger Ferguson, A Voting Member of The FOMC, Resigns; Prime Rate Increase Still Likely In 3 Weeks

Dr. Roger W. Ferguson announced that he will be resigning his post as Vice Chairman of The Federal Reserve Board effective April 28, 2006. As a Fed governor, Dr. Ferguson has been a voting member of the interest rate setting Federal Open Market Committee (FOMC)--all Fed governors are voting members of the FOMC. As is the custom with exiting Fed governors, Ferguson won't vote in the next FOMC meeting, which is scheduled to take place on March 28, 2006.

Appointed to the Fed board by President Bill Clinton back in 1997, Dr. Ferguson became a shining star within the Federal Reserve system when the terrorist attacks of September 11, 2001 happened: Ferguson was the only Fed governor in Washington, D.C. during the attacks (Alan Greenspan was vacationing in Switzerland at the time); Ferguson was at his post, and doing his job very well, providing liquidity for the nation's markets during that economically stressful time. The day after the September 11 attacks, the Fed loaned $46 billion to commercial banks around the country, which, at the time, was more than 200 times the daily overnight loan average.

Dr. Ferguson is well respected throughout the political, banking and investing communities, and I think it's safe to write that he will be missed by a wide range of folks.

Click here to view the official Fed statement related to Dr. Ferguson's resignation.

Click here to view Dr. Ferguson's resignation letter.


Dr. Ferguson recently spoke at Howard University; here are some snippets from his speech:

"...Indeed, the most recent data suggest that economic activity in 2006 is off to a solid start...

...All told, increases in energy prices over the past couple of years probably added about 1/2 percentage point to core inflation in 2005, and the lagged pass-through of past increases in energy prices appears likely to add roughly the same amount this year, provided that energy prices do not rise significantly further...

...Another development that has received considerable attention recently is the term structure of interest rates--the yield curve. Typically, longer-term interest rates are higher than short-term rates, so a curve plotting yields would rise as maturity lengthens. However, since late last fall, yields on longer maturities have been equal to or less than those at some shorter maturities, creating a flat to inverted yield curve. Going back to the 1950s, a simple picture suggests that the yield curve tends to invert before recessions. In addition, some academic research, along with recent market commentary, suggests that the shape of the yield curve is a strong predictor of future economic growth.

However, the Treasury yield curve is now only slightly inverted between one and five years and is roughly flat beyond that. Moreover, yield curves can be flat or inverted either because short-term interest yields are relatively high or because long-term rates are relatively low. Historically, flat or inverted yield curves owing to unusually high short-term rates have tended to be followed by slowdowns, but that has not been the case for those episodes of inverted yield curves owing to relatively low long-term rates. And, in the current situation, the flatness of the term structure results largely from relatively low long-term yields...

...All told, the U.S. economic expansion appears to be solidly on track. Nevertheless, the outlook for real activity faces a number of significant risks, including the possibility that house prices and construction could retrench sharply and that energy prices could rise significantly further...

...Given the limits of what we know about the future path of housing prices and about the implications of any particular house-price scenario for real activity, the Federal Reserve will have to continue monitoring this area closely...

...In the current situation, the economic expansion appears to be on track and core inflation has remained moderate. As I indicated, significant risks, if realized, could alter this generally sanguine outlook, and the Federal Reserve will continue to monitor developments closely. Given the considerable uncertainties facing the economy and the outlook for policy, policy decisions in coming months will depend heavily on the implications of incoming economic data for future growth and inflation."

I think that Ferguson's comments about the current inversion of U.S. Treasury Note yields is very significant. Right now, yields are slightly inverted, and an inversion of Treasury Note yields has often preceded an economic slowdown in the U.S. However, the inversion that we are seeing right now is actually being caused by "relatively low long-term yields" and not by relatively high short-term yields, and, in the past, it was the inversions caused by relatively high short-term yields that have often preceded an economic downturn.

With the next FOMC meeting taking place in about 3 weeks, and the U.S. economy continuing to move forward, another 25 basis point increase to The Federal Funds Rate is still very likely on March 28, 2006. (that would, of course, translate to a quarter point increase to the U.S. prime rate, a.k.a. the published Wall Street Journal® prime rate.)


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

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European Central Bank Raises Benchmark Lending Rate to 2.5%

The European Central Bank (ECB) has raised its benchmark lending rate from 2.25% to 2.5% in order to keep inflation in check. Today's rate increase in Europe is a response to strong growth within the euro-region economy, and consistently high crude oil prices.

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