MONEY MARKETS-Futures support view of Fed raising rates in mid-2015

Wed Jun 18, 2014 4:35pm EDT

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(Updates market action after news conference, adds quote, byline)

By Richard Leong

NEW YORK, June 18 (Reuters) - U.S. short-term interest rates futures ended higher on Wednesday as the latest forecasts among Federal Reserve policymakers supported the view the central bank may increase rates in mid-2015.

The rate forecasts coincided with policymakers' decision to further shrink the Fed's monthly purchases of Treasuries and mortgage-backed securities to reduce stimulus to the economy, which policymakers expected to expand more slowly in 2014 due to a contraction in the first quarter.

They clung to their March forecasts that gross domestic product will grow 3.0-3.2 percent in 2015 and 2.5-3.0 percent in 2016.

"If the economy continues on its current path, the first rate increase should come in the second or third quarter of 2015," said Mike Cullinane, head of Treasuries trading at D.A. Davidson in St. Petersburg, Florida.

Prices on U.S. rates futures for 2014 and 2015 were choppy and ended modestly higher on perceived dovish remarks from Federal Reserve Chair Janet Yellen during her news conference.

Federal funds futures for June 2015 delivery fell to a 2-1/2 month low of 99.625 before rebounding to 99.670, up 1.5 basis points from Tuesday's close.

The price move suggested traders briefly priced in a 61 percent chance the central bank would raise short-term rates from its zero to 0.25 percent target range at its policy meeting a year from now before dialing it back to 56 percent, according to CME Group's FedWatch, which calculates the traders' expectations on changes to Fed's policy rate.

This compared with a 58 percent chance of a June 2015 rate increase on Tuesday.

The July 2015 fed funds contract closed up 1.5 basis points at 99.615, recovering from a session low of 99.575 as Yellen downplayed the higher median forecasts on the fed funds rate at the news conference.

The July 2015 contract implied traders expected a 75 percent chance of the Fed's first rate increase 13 months from now, down from 77 percent on Tuesday.

"She did her best to minimize the significance of the latest economic projections," Cullinane said.

The Fed said the central bank officials' median view of the fed funds rate at the end of 2015 was 1.125 percent, up from 1.000 percent based on their March forecasts.

Their median outlook for the fed funds rate at the end of 2016 was 2.50 percent, up from 2.25 percent in March.

However, their median longer-run view on the fed funds rate was downgraded to 3.75 percent from 4.00 percent in March. (Reporting by Richard Leong; Editing by Nick Zieminski and Chizu Nomiyama)

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