Minutes From The March 28-29, 2006 FOMC Meeting Were Released Today; Prime Rate Increase Likely on May 10, 2006

The minutes from the March 28-29, 2006 Federal Open Market Committee (FOMC) meeting were released earlier today. A couple of interesting snippets from those minutes can be found below:

"...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 4¾ percent at this meeting. The economy seemed to be on track to grow near a sustainable pace with core inflation remaining close to recent readings against a backdrop of financial conditions embodying an expectation of some tightening. Since the available indicators showed that the economy could well be producing in the neighborhood of its sustainable potential and that aggregate demand remained strong, keeping rates unchanged would run an unacceptable risk of rising inflation. Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy. However, members also recognized that in current circumstances, checking upside risks to inflation was important to sustaining good economic performance. The need for further policy firming would be determined by the implications of incoming information for future activity and inflation..."

"...With regard to the Committee's announcement to be released after the meeting, members expressed some difference in views about the appropriate level of detail to include in the statement. In the end, they concurred that the statement should note that economic growth had rebounded in the current quarter but that it appeared likely to moderate to a more sustainable pace in coming quarters. Policymakers agreed that the announcement should also highlight the favorable outlook for inflation and summarize their reasons for that assessment, but that it should reiterate that possible increases in resource utilization, along with elevated levels of commodity and energy prices, had the potential to add to inflation pressures. Changes in the sentence on the balance of risks to the Committee's objectives were discussed. Several members were concerned that market participants might not fully appreciate the extent to which future policy action will depend on incoming economic data, especially when an end to the tightening process seems likely to be near. Some members expressed concern that retention of the phrase "some further policy firming may be needed to keep the risks...roughly in balance" could be misconstrued as suggesting that the Committee thought that several further tightening steps were likely to be necessary. Nonetheless, all concurred that the current risk assessment could be retained at this meeting..."

Interesting notes, notes that many on Wall Street were happy to read, as the Dow Jones Industrial Average (DJIA) gained a very healthy 194 points today. Investors responded to today's release with bullishness because they divined the language in the Fed minutes as a hint that the Fed may end their rate raising regimen at the next FOMC meeting, which is scheduled to take place on May 10^th, 2006.

As we move into the second quarter, the economy still appears to be advancing with a full head of steam. Unemployment is low--the U.S. has a jobless rate that is the envy of many nations in the industrialized world--and the latest government reports on the U.S. economy indicate that inflation may not be a serious problem.

Of course, the ever increasing cost for a barrel of the light sweet stuff (crude is currently @ $72 per barrel in New York, and rising) is still threatening to "pass through" and cause general price increases for both consumers and producers--inflation--and this may prompt the Fed to raise their benchmark Fed Funds Rate beyond 5% later this year. Other issues that are influencing the cost of crude oil include:

• Political tensions in Nigeria, Iran and Iraq (Iraq is pumping less oil today than it was before the war.)
  
  
• The summer driving season is upon us, which means increased demand for fuel.
  
  
• The conversion from MTBE reformulated gasoline (RFG) to ethanol RFG in certain regions of the U.S. including the East Coast and major metropolitan areas in Texas.
  

The Latest Prime Rate Predictions

The investors who trade in Fed Funds Futures are now predicting (according to current pricing) a 100% chance that The FOMC will raise The Fed Funds Target Rate by another 25 basis points (0.25 percentage points) when The FOMC convenes their third monetary policy meeting for 2006, which is scheduled to take place on May 10^th, 2006. A quarter point increase to the Fed Funds Target Rate would, of course, translate to a nationwide Prime Rate increase from the current 7.75% to 8.00%.

The fourth FOMC meeting for 2006 is set to convene on June 28-29, 2006, and Fed Funds Futures traders are now predicting (according to current pricing) a 30% chance that The FOMC will raise The Fed Funds Rate by another 0.25 percentage points when the June 28-29 meeting adjourns.

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 (Wall Street Journal® Prime Rate) is 7.75%, and a jump to 8.00% is very likely after the FOMC adjourns on May 10^th, 2006.