Rate futures show high chance Fed will cut rates

CHICAGO (Reuters) - U.S. short-term interest rate futures rose sharply on Monday to reflect higher prospects for a rate cut at or before Tuesday's Federal Reserve policy meeting.

Dealers responded to a fresh crisis in financial markets after investment bank Lehman Brothers filed for bankruptcy over the weekend, and to sharply lower calls for the U.S. stock market.

The Federal Open Market Committee holds hold a regularly scheduled meeting on Tuesday.

Implied prospects for the Fed to lower the benchmark fed funds rate to 1.75 percent traded as high as 92 percent and have now subsided to 72 percent. On Friday, prospects for a September rate cut were a slim 12 percent.

A single, quarter-point rate cut is fully priced by the December FOMC meeting.

"It looks like the market is looking at just a 'one and done' scenario," said Rudy Narvas, analyst at 4CAST Ltd in New York.

The Fed late on Sunday announced several measures aimed at mitigating strains in financial markets.

Those moves included enlarging the range of available collateral for the Primary Dealer Credit Facility and the Term Securities Lending Facility.

"It is only prudent to consider all available tools at the Fed's immediate disposal ... The option of adjusting the funds rate per se is probably not at the top of the priority list," said Thomas Lam, senior Treasury economist at United Overseas Bank Group in Singapore.

(Reporting by Ros Krasny; Editing by James Dalgleish)