Odds On A Prime Rate Increase for August 8 Drop to 31% on Release of GDP "Advance" Numbers for Q2

Earlier today, the Commerce Department released the Gross Domestic Product (GDP) "Advance" numbers for Q2, 2006. Forecasters were expecting a 3.2% rise in GDP, but the actual figure was 2.5% (annualized.) To give you some more perspective, the "Final" GDP numbers from Q1, 2006 indicated that the economy grew at an annual rate of 5.6%.

Yup, the economy is definitely showing signs of slowing, and a slowing economy means that the Fed is less likely to raise interest rates again at the August 8^TH Federal Open Market Committee (FOMC) meeting.

As you might have guessed, the investors who trade in Fed Funds Futures have reacted to today's GDP report. According to my latest check on the pricing of interest rate futures contracts, the odds that the FOMC will elect to raise the benchmark Fed Funds Target Rate to 5.50% on August 8^TH have dropped to around 31%.


Simple Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will rise
  to 8.50% on August 8, 2006: 31%
  
  
• NB: Prime Rate = (The Target Fed Funds Rate + 3)
  

The odds related to the Fed Funds Futures trade--widely accepted as the best predictor of where the FOMC will take the benchmark Federal Funds Target Rate--are continually changing, so stop by often for the latest odds. Odds may shift on Tuesday, August 1, when the Commerce Department releases their report on consumer spending, and on Friday, August 4, when the Labor Department releases their monthly Employment Situation report.

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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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FOMC Meeting Schedule (Tentative) for 2007

Earlier today, The Federal Open Market Committee (FOMC) released its tentative monetary policy meeting schedule for 2007. The FOMC doesn't always stick to the exact dates on the schedule (hence tentative), but they do always meet at least 8 times per calendar year.

Why is this schedule important to you? Because it is at these monetary policy meetings that The FOMC votes on whether to raise, lower or make no changes to The Fed Funds Target Rate, and when the Fed Funds Target Rate changes, The Wall Street Journal® Prime Rate (also known as the fed, national or U.S. Prime Rate) will also change.

Here's the tentative schedule for 2007:

January 30-31, 2007

March 20-21, 2007

May 9, 2007

June 27-28, 2007

August 7, 2007

September 18, 2007

October 30-31, 2007

December 11, 2007

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The Odds On Another Prime Rate Increase Hit 65%

Yesterday, the Department of Labor released the Producer Price Index (PPI) numbers for June, 2006. The PPI report showed that wholesales prices rose at a rate that many economists weren't expecting--0.5%--with higher food and energy prices leading the charge against producers' wallets. The numbers in today's Consumer Price Index (CPI) report were closer to economists' expectations, but when the investors who trade in interest rate futures digested both the PPI and the CPI numbers, the odds on another quarter-point rate increase for August 8^TH rose as high as 85%.

Bernanke Expects Inflation to Ease

After Fed Chairman Bernanke spoke before the Senate Banking Committee today, the odds on another interest rate increase for August 8^TH fell to 65% (according to my most recent price check on Fed Funds Futures contracts.) Dr. Bernanke said that he expects core inflation to ease in coming months as the U.S. economy slows. Thomas Hoenig, the President of the Kansas City Federal Reserve Bank, also made positive comments today related to the forecast for inflation.


Prime Rate Prediction: The Latest Prime Rate Forecast:

• Current odds that the Prime Rate will rise
  to 8.50% on August 8, 2006: 65%
  
  
• NB: Prime Rate = The Fed Funds Target Rate + 3
  

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 stay tuned to this Prime Rate blog for the latest odds. Odds may shift tomorrow afternoon after the FOMC releases the minutes from the June 28-29 FOMC monetary policy meeting.

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The Odds On Another Prime Rate Increase Fall to 52%

The odds that the Federal Open Market Committee (FOMC) will elect to raise the benchmark Federal Funds Target Rate to 5.50% on August 8^TH have dropped to 52% today, according to current pricing on Fed Funds Futures contracts. The probability of another rate increase dropped as a result of 2 key economic reports released today: The Commerce Department's report on Retail Sales for June, and the University of Michigan's Consumer Sentiment Index for this month. The U.S. economy is exhibiting clear signs of slowing, and the lower-than-expected Consumer Sentiment index for July means that consumers may cut back on spending in the coming months.


Simple Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will rise
  to 8.50% on August 8, 2006: 52%
  

The odds related to the Fed Funds Futures trade--widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate--are continually changing, so stay tuned to this blog for the latest odds, especially when The FOMC releases the minutes from the June 28-29 FOMC monetary policy meeting, which should happen on July 20^TH, 2006.


In other Prime Rate news, the Bank of Japan (BOJ) has raised its benchmark lending rate to 0.25 percent, ending a 5+ year policy of virtually free borrowing for Japanese banks. Governor Toshihiko Fukui and Co. are likely to keep interest rates low for the rest of 2006, so as to give the Japanese economy a fighting chance of leaving 7 years of deflation behind.

By size, the Japanese economy is second only to the United States.

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The Odds On Another Prime Rate Increase Hold at 62%

At the end of last week, The U.S. Department of Labor released the Employment Situation report for June, 2006. The Employment report offers significant insight as to the state of the U.S. job market, so academics, economists, investors and the Fed pay close attention to it. According to the report, average hourly earnings increased by 0.5% when compared to May's numbers; economists were expecting a rise of 0.3%. Also, the U.S. economy added 121,000 jobs in June, while economists were expecting around 185,000 new jobs.

The above figures explain why the investors who trade in Fed Funds Futures still have odds at around 62% (according to current pricing on contracts) that the Fed will elect to raise the benchmark Fed Funds Target Rate to 5.50% on August 8^TH.

One might expect the odds to rise because of the 0.5% increase in average hourly earnings, because the Fed tends to raise interest rates when inflation rears it's ugly head, and the higher-than-expected increase in hourly earnings for June translates to "threat of wage inflation" in the Fed lexicon.

However, the lower-than-expected number of jobs added in June balances out the wage inflation threat, because it means that the job market isn't as tight as economists were expecting. When the job market is tight, there's increased pressure on employers to pay higher wages, simply because there are fewer candidates to choose from. And when employees are earning more, they tend to spend more, and that can cause inflation to accelerate.

Simple Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will rise
  to 8.50% on August 8, 2006: 62%
  

The odds related to Fed Funds Futures contracts--generally accepted as the best predictor of where the FOMC will take the cardinal Fed Funds Target Rate--are continually changing, so stay tuned to this blog for the latest odds, especially when The FOMC releases the minutes from the June 28-29 FOMC monetary policy meeting, which should happen on July 20^TH, 2006.

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Interest Rates Are Rising, Which May Translate to Financial Dire Straits for Those with Adjustable-Rate Mortgages (ARM's)

The Prime Rate has been on the rise since the summer of 2004, and with rising interest rates comes higher minimum payments on revolving credit card balances, higher payments on Home Equity Lines of Credit (HELOC), and, for those who opted for an Adjustable-Rate Mortgage (ARM) that's tied to the Prime Rate, it means that the mortgage bill has been eating up more and more of the household budget (depending on when the low interest "teaser" period ended.)

Quick Tip: A Home Equity Loan (HEL) is typically more
consumer-friendly than a Home Equity Line of Credit (HELOC).
Suze Orman offers some great tips here.

When compared to other mortgage products, ARM's are often easier to get, and sometimes borrowers signup for ARM's that they can't afford: when the low interest period on the ARM ends, the monthly payment then rises to a level that the borrower didn't anticipate, and can't manage. This can mean serious financial trouble for the borrower, even foreclosure in the worst cases.

The folks at Bills.com recently issued a press release with some great tips on how to avoid the financial headaches that often accompany rising interest rates. Here's a clip:

"As any real estate agent knows, home sales heat up with rising temperatures every summer. Now, with mortgage interest rates more than a full point higher than at this time last year, fuel costs riding high, higher minimum credit card payments and consumer debt still raging, many U.S. homeowners risk foreclosure on their homes -– but they don’t have to lose their slice of the American dream.

'Last year, 31 percent of home loans issued were adjustable-rate mortgages (ARM's), which could spell big trouble as fixed mortgage rates hover around 6.83 percent and ARM's are poised to go much higher,' said Brad Stroh, chairman of Bills.com. 'Holders of ARM's will be paying an additional $14 billion annually for every 1 percent increase in mortgage rates. People who bought homes at the edge of their spending ability with an ARM could face dire consequences as their mortgage payments increase -- but they can take steps to keep their financial situations in check.'

According to the Mortgage Bankers Association of America, 4.7 percent of U.S. mortgages were delinquent at the end of 2005. With $9 trillion in outstanding U.S. mortgage debt, that places $423 billion at risk of foreclosure. Homeowners who are at risk (as well as prospective homeowners) can use the tips below to avoid mortgage trouble.

How to prevent problems:

• Create a budget and don’t stretch yourself too far. The unexpected can and does happen to millions of Americans each year. For people who live at the far edge of their means, one life event can hijack their lives and lead to defaults on bills and/or mortgage payments. The key is to build a detailed budget of income and expenses, making sure to allow some breathing room to weather an unexpected downturn.
  
  
• Be very careful with ARM's or interest-only loans. These types of loans let borrowers qualify for more expensive homes -– but beware as rates (and payments) climb. If you can barely afford the payment on your ARM or interest-only mortgage, you are asking for trouble in a few years when the 'teaser period' expires and your loan re-sets to a fixed rate. Be sure you have extra cushion in your budget with these loans.
  
  
• Don’t jump to refinance your home to pay off credit card debt. Many people faced with large credit card debt or other unsecured debts consider refinancing their homes. But this strategy only moves the debt, securing it with your home. That puts your home is at risk of foreclosure if you are unable to pay. If you are not confident that you can keep up with your home loan payments, consider debt resolution or another debt relief option.
  

'We can’t emphasize enough that people must educate themselves about what they're getting into with a mortgage,' Stroh added. 'Overall debt problems will continue to escalate unless people rein in their spending to live within their means. Unfortunately, for some people, that may mean losing their home to resolve their financial situation.'

How to avoid foreclosure -- if it’s already on its way:

• Enter into a forbearance agreement. For a temporary hardship, lenders might grant a forbearance agreement to lower –- or eliminate –- payments for a limited time.
  
  
• Consider loan modification. A loan modification seeks a permanent change to the loan, such as lowering the payment and extending the loan’s term, or incorporating any delinquencies into future payments.
  
  
• Obtain a 'deed in lieu' of foreclosure. A 'deed in lieu' essentially allows the borrower to return the title or deed of the property -– giving the home back -– to the mortgage holder to avoid foreclosure.
  
  
• Sell the home. Selling your home may not be ideal, but it is a way to avoid foreclosure proceedings on your house and pay back your lender.
  
  
• Refinance the loan. It may be possible to refinance your mortgage for a lower interest rate and/or lower monthly payment (this is much different than refinancing to take cash out to pay off credit cards). However, if you already have had late payments on your mortgage, the interest rate offered to you may be too high to lower your monthly payment. Educate yourself on current rates by checking online rate comparison sites and using online calculators to determine the real costs of refinancing. These tools are available on a number of Web sites, including http://www.bills.com/calculators/.
  
  
• Be cautious. Be wary of so-called equity skimmers. If your house is facing foreclosure, you will probably receive numerous solicitations from companies looking to 'help' you prevent foreclosure by offering to sell your home for you or by taking ownership of your home. In most cases, these solicitations are scams trying to take advantage of people in difficult situations. The perpetrators aim to snatch the equity you have built up in your home.
  

In many states, foreclosure rates have already started to increase, especially impacting the segment of the population that carries adjustable-rate mortgage loans, whose payments climb upward with every interest-rate increase. However, homeowners can make choices -– ideally, before they purchase a home, but even after problems arise -– that will help them keep a home, or at least minimize the damage a foreclosure could have on their futures."

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