(Adds details, comments, updates prices)
By Ros Krasny
CHICAGO, Dec 14 (Reuters) - U.S. short-term interest rate futures fell heavily on Friday after bigger than expected increases in consumer prices cast doubt on the wisdom of additional Federal Reserve rate cuts.
The implied chances that the Federal Reserve would cut its benchmark lending rate in January to 4 percent fell as low as 80 percent, the lowest since Nov 28.
“More evidence of rising inflation underlines the Fed’s policy bind,” said Ashraf Laidi, chief FX analyst at CMC Markets US in New York.
For much of the past few weeks futures have priced a federal funds rate of 4 percent or below following the Jan 29-30 Federal Open Market Committee meeting.
The core consumer price index increase of 0.3 percent was above the consensus forecast of 0.2 percent, while the 0.8-percent jump in headline prices was the largest since September 2005, pushed up by a 9.3-percent hike in gasoline prices.
“Core CPI was a real shocker,” said Rudy Narvas, analyst at 4CAST Ltd. in New York. “You have to keep in mind that the key concern of the Fed at this point is the dislocation of credit markets, although this makes policy a little trickier.”
The report was consistent with Thursday’s wholesale inflation report, data that was also paired with stronger than expected consumer spending in November.
“All of those dovish, weak-money individuals out there screaming for rate cuts really need a bucket of cold water in the face,” said Michael Darda, chief economist at MKM Partners LLC in Greenwich, Connecticut.
Laidi said the inflation trend could spur the Fed to lean more on solutions to boost liquidity in money markets that do not involve cutting interest rates, such as the series of measures announced on Wednesday in concert with other global central banks.