Fed rate cut ideas up on weak jobs

SUNNYVALE, California (Reuters) - U.S. short-term interest rate futures rose on Friday on news that U.S. firms cut payrolls for a third consecutive month, as dealers raised bets that the Federal Reserve will make an aggressive interest rate cut this month and beyond.

The implied prospects for the Fed to cut its benchmark lending rate by 50 basis points at the April 29-30 policy meeting hit 40 percent against 20 percent late on Thursday.

A smaller, 25 basis point rate cut from the Federal Open Market Committee, which would take the fed funds rate to 2 percent, is fully priced.

"The market is way too premature in thinking that Fed easing will stop with a funds rate above 1.75 percent," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

The U.S. Labor Department said nonfarm payrolls fell by 80,000 in March, more than expected, and job losses for January and February were revised to be bigger than originally reported.

Meanwhile, the U.S. jobless rate jumped to 5.1 percent from 4.8 percent, the highest since September 2005.

"If we were not in a recession before, it looks like we are likely in one now," said Rudy Narvas, analyst at 4CAST Ltd in New York.

Dealers have cut back on prospects for aggressive easing in recent days, guessing that there is opposition within the Fed to pushing rates much below current levels because of worries about stoking inflation.

However, the rising jobless rate suggests less pressure on resources.

"This will allow the Fed to do further easing in monetary policy without a rise in core inflation," said Robbert Van Batenburg, head of global research at Louis Capital Markets in New York.