No Action on Interest Rates Today: Prime Rate Remains at 8.25%

In keeping with predictions, the Federal Open Market Committee (FOMC) of the Federal Reserve met today and decided to leave interest rates at their present level. Therefore, the benchmark Federal Funds Target Rate will remain at 5.25%, and the Wall Street Journal® Prime Rate (the U.S. Prime Rate) will remain at the current 8.25%.

Once again, today's FOMC vote wasn't unanimous: as he did at the August 8, 2006 FOMC monetary policy meeting, Fifth District Federal Reserve Bank President Dr. Jeffrey M. Lacker did not vote with the pack, instead voting for a 25 basis point increase for the Fed Funds Target Rate today.


Prime Rate Forecast: What's Ahead for the Prime Rate?

The one-two punch of a cooling U.S. economy and easing crude oil prices should keep inflation on the ropes moving forward, so most experts are predicting that the Fed will leave interest rates at their present level for the rest of 2006. In fact, some economists and academics are predicting that the Fed will start to bring interest rates down as early as Q1, 2007.

As of right now, the investors who trade in Fed Funds Futures have odds at about 6% (according to current pricing on contracts) that the FOMC will elect to raise the benchmark Fed Funds Target Rate by 25 basis points at the October 24^TH monetary policy meeting.


Simple Summary of the latest Prime Rate Predictions:

• Current odds that the Prime Rate will rise
  to 8.50% on October 24^TH, 2006: 6%
  
  
• NB: Prime Rate = (The Fed 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 (TIP: type the URL www.PrimeRatePredictions.com into your web browser as a shortcut to this blog, or, if you prefer, www.PrimeRateForecast.com).


Here's a clip from the press release that was issued by the FOMC this afternoon:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.

Readings on core inflation have been elevated, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

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; Frederic S. Mishkin; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting."

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The Prime Rate Will Remain At 8.25% After The Fed Meets Tomorrow

The Federal Open Market Committee (FOMC) meets tomorrow to discuss monetary policy, and, as of right now, it is virtually a sure bet that the group will opt to leave interest rates alone. All we need do is examine the data in the latest government reports: Housing Starts are down, and, judging by the numbers in last week's Consumer Price Index (CPI) and today's Producer Price Index (PPI) reports, the Fed should be OK with the current state of inflation.

At my most recent check, the investors who trade in Fed Funds Futures have odds at around 6% (according to current pricing on contracts) that the FOMC will vote to raise the benchmark Fed Funds Target Rate by 25 basis points to 5.50% by the end of 2006. After tomorrow's FOMC monetary policy meeting, there will be 2 more meetings left in 2006: October 24^TH and December 12^TH (visit www.FOMC.tv for the current FOMC monetary policy meeting schedule.)


Summary of The Latest Prime Rate Predictions:

• Current odds that the Prime Rate will rise
  to 8.50% tomorrow: negligible (very unlikely)
  
  
• Current odds that the Prime Rate will rise
  to 8.50% by the end of the year: 6%
  
  
• NB: Prime Rate = (The Fed Funds Target Rate + 3)

The current U.S. Prime Rate (WSJ Prime Rate) is 8.25%.

The odds related to the pricing on Fed Funds Futures contracts -- widely accepted as the best predictor of future monetary policy moves by the FOMC -- are continually changing, so stay tuned for the latest odds.

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The Latest Odds Suggest That The Fed Is Done with Raising Rates for 2006

The 2 years of policy tightening that came to an end this past June may be just that: an end, and not a pause. Raising interest rates to fight inflation, without pushing the economy into recession, is a tricky matter, but it looks like the Federal Open Market Committee (FOMC) may have pulled it off. The economy is definitely slowing, but recent data suggest that it's coming in for a soft landing, and not crashing: Factory Orders and Construction Spending fell in July, but, on the flip side, the closely-watched Employment Situation Report indicates that unemployment fell from 4.8% to 4.7% in August, 2006, and 128,000 jobs were created.

While inflation is still a concern, the slowing economy should be enough to get inflation to cry uncle. It is, therefore, very likely that the FOMC will choose to leave interest rates alone at the September 20^TH monetary policy meeting. Remember: the ripple effect of a policy move by the Fed can take anywhere from 3 to 18 months to make its way through the economy.


At my most recent check, the investors who trade in Fed Funds Futures have odds at about 6% (according to current pricing on contracts) that the FOMC will elect to raise the benchmark Fed Funds Target Rate by 25 basis points to 5.50% at the September 20^TH monetary policy meeting. The probability that the FOMC will raise the Fed Funds Target Rate to 5.50% by the end of this year fell to around 12% some time after the August, 2006 Employment Situation report was released yesterday.


Summary of The Latest Prime Rate Predictions:

• Current odds that the Prime Rate will rise
  to 8.50% on September 20^TH, 2006: 6%
  
  
• Current odds that the Prime Rate will rise
  to 8.50% by the end of the year: 12%
  
  
• NB: Prime Rate = (The Fed Funds Target Rate + 3)

The current U.S. Prime Rate (WSJ Prime Rate) is 8.25%.

The odds related to the pricing on Fed Funds Futures contracts -- widely accepted as the best predictor of future monetary policy moves by the FOMC -- are continually changing, so stay tuned for the latest odds.


In website news, we've recently added a page featuring foreign prime rates. The foreign prime rates page will be updated on a weekly basis.

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