MONEY MARKETS-U.S. rate futures rise as Fed signals dovishness

By Luciana Lopez
NEW YORK, Aug 22 (Reuters) - U.S. short-term interest rate
futures rose on Wednesday as traders bet dovish minutes of the
Federal Reserve's last policy meeting could mean more stimulus
for the world's biggest economy in coming weeks.
In minutes of the July 31-Aug. 1 meeting, the Fed said that
"many members judged that additional monetary accommodation
would likely be warranted fairly soon unless incoming
information pointed to a substantial and sustainable
strengthening in the pace of the economic recovery."

The Fed's remaining policy tools include a third round of
quantitative easing in the form of large-scale bond purchases --
known as QE3 -- and lowering the interest it pays banks on
excess reserves (IOER) they leave with the central bank.
After the minutes were released, traders saw the first
chance of the Fed hiking interest rates in September 2014, based
on futures trading at CME Group Inc's Chicago Board of Trade , compared to previous expectations of a hike in July
2014.
The Fed has held its target for the federal funds rate in a
range of zero to 0.25 percent since December 2008.
"This is a fairly surprising discussion by the Fed, probably
different than the expectation," said Timothy Ghriskey, chief
investment officer at Solaris Asset Management in Bedford Hills,
New York.
"Specifically, that many Fed officials think an asset
purchase program would benefit, or boost the recovery.
Continuing to lower longer term interest rates was also a
surprise here. The minutes were a significant support for a QE3
package," he added.
The December 2014 Eurodollar contract last traded up
8 basis points at 99.285, off slightly from a session high of
99.300. Eurodollar futures for 2016 to 2019 edged
slightly higher, as well.
Benchmark three-month dollar Libor fell to
0.43075 percent, its lowest level since late October, when it
fixed at 0.42944 percent.
The three-month Euribor rates, traditionally
the main gauge of unsecured bank-to-bank lending, eased to 0.31
percent from 0.318 percent on Tuesday.
Across the Atlantic, the European Central Bank is expected
to cut its refinancing rate by another 25 basis points to 0.5
percent at its next meeting on Sept. 6., according to a Reuters
poll of economists.
Expectations the European Central Bank will take steps to
lower Spanish and Italian borrowing costs and calm the debt
crisis that has driven much of the euro zone into recession has
helped drive money market rates higher.