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Traders push expectation for first Fed rate hike to 2015

Wed Jul 31, 2013 2:51pm EDT

(Reuters) - Traders on Wednesday pushed their expectations for a first interest rate hike from the Federal Reserve into early 2015 after the central bank offered no hint it plans to trim its massive bond-buying program soon.

Fed funds futures contracts pared losses and then rose after traders digested the Fed's decision from its two-day meeting to keep buying bonds until the labor market outlook improves substantially. The contracts, tied to the Fed's policy rate target, rise in price when traders see a bigger chance of a later Fed rate hike.

Futures prices now suggest traders see the first chance of a rate hike in January 2015, putting the probability of an increase then at 57 percent, according to CME Group's Fed Watch, which generates probabilities based on the price of Fed funds futures traded at the Chicago Board of Trade.

Before the Fed policy statement, and immediately after its release, traders clung to their expectation the Fed would start raising rates in December 2014.

But Wednesday's statement signaled concern about higher mortgage rates and flagged the risks of inflation falling too far below the Fed's target.

Trimming the bond-buying program is seen as a first step toward an eventual normalizing of monetary policy, which would include raising the Fed's short-term interest-rate target.

After Fed Chairman Ben Bernanke in June said the central bank could reduce its $85 billion-a-month bond-buying program later this year, short-term interest-rate traders began pricing in a rate hike for late 2014.

But most Fed policymakers themselves have signaled they do not expect to raise rates until 2015.

(Reporting by Ann Saphir; Editing by Diane Craft and Dan Grebler)

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