U.S. Rate Futures: Fed seen on hold until late 2011

CHICAGO (Reuters) - U.S. interest-rate futures traders expect the Federal Reserve to keep its key target rate at the current near-zero level until later in 2011, after the Fed said on Tuesday it will use proceeds from maturing mortgage-bonds to buy long-term government debt.

The decision marks a policy shift for the U.S. central bank, which until recently had been debating when and how best to tighten monetary policy.

By promising to reinvest maturing securities, the Fed signaled that it wants to keep its extremely loose monetary policy in place to nurture a slowing economic recovery.

"They are not removing accommodation; they are maintaining it," said Gary Thayer, chief macrostrategist for Wells Fargo Advisors in St. Louis, Missouri.

Traders are now pricing in a 74 percent chance the Fed will raise its target rate for overnight lending between banks next September, trading in fed funds futures at CME Group Inc's Chicago Board of Trade shows. That's down from 82 percent before the Fed's announcement.

The increase would be to just 0.50 percent, from the current range of zero to 0.25 percent. Traders are not fully pricing in such a hike until the Fed's November 2011 meeting.

(Reporting by Ann Saphir; Editing by James Dalgleish)