Futures Traders Boost Bets On More Fed Rate Increases

(Bloomberg) -- Futures traders added to bets that the U.S. Federal Reserve will raise its interest-rate target at least one more time this year after central bank policy makers today increased the rate an 11th straight time, to 3.75 percent.
The yield on the December federal funds futures at the Chicago Board of Trade rose 6.5 basis points to 4.02 percent, indicating traders are certain the Fed will lift the rate to 4 percent by year end and see a 13 percent chance of a 4.25 percent rate. Yesterday they saw no chance of a 4.25 percent year-end rate.
Fed Chairman Alan Greenspan has led central bank policy makers in lifting the target by a quarter-point at each meeting since June 30 last year. After the devastation of Hurricane Katrina, some economists cut their growth estimates for this year and traders erased bets on interest-increases.
``Looks like the Fed will stay in play a little bit longer than traders thought two weeks ago after the hurricane,'' said John Brady, an interest-rate broker for Man Financial Inc. at the Chicago Mercantile Exchange.
Economists at four firms, including UBS Securities LLC, predicted the Fed wouldn't raise the rate today, the first time in at least four months that all 22 so-called primary dealers of U.S. government debt didn't agree on higher rates. Traders are favoring a pause after the Nov. 1 meeting.
Betting on More Increases
``Higher energy and other costs have the potential to add to inflation pressures,'' the Fed said in its statement today. Central bankers' concern about inflation is pushing traders to price in a higher chance of a rate increase at each of the next two Fed meetings, Brady said.
``This does not look to us like a statement from a committee that thinks monetary policy is only 25 basis points away from being neutral,'' John Ryding, chief U.S. economist at Bear, Stearns & Co., wrote in a note to investors. ``We continue to look for the Fed to hike rates'' in November and December.
Futures are agreements to buy or sell assets at a set date and price. Contracts on interest rates are settled in cash. Fed funds futures settle at the federal funds effective rate, which is the average of all overnight rates for the month.
An increase in the Fed's target to 4.25 percent on Dec. 13 would raise the average overnight rate that month to 4.153 percent. The rate on the contract is derived by subtracting the contract's price from 100.

To contact the reporters on this story:
Ann Saphir in Chicago at asaphir@bloomberg.net