US RATE FUTURES-Prospects fading for deep Fed cuts

By Ros Krasny

CHICAGO (Reuters) - U.S. short-term interest rate futures dropped sharply in Thursday's short trading session, cutting back on the implied outlook for Federal Reserve rate cuts at the April and June policy meetings.

The sell-off reflected a factory survey from the Philadelphia Federal Reserve that was not as weak as feared and a sharp rally in U.S. stock markets. Major equity indices were up about 2 percent in afternoon trading.

Futures ended the week suggesting the federal funds rate will fall no lower than 1.75 percent in the Federal Open Market Committee's current cycle of rate cuts.

"A less aggressive policy path is expected relative to what we've seen from the Fed in recent months," said strategists at Action Economics. "There's considerable uncertainty over what the FOMC might do next."

The implied prospects for the Fed to slash its benchmark lending rate by another one-half percentage point in April FFK8 to 1.75 percent, dipped to 40 percent from 82 percent late on Wednesday.

A one-quarter point rate cut, which would take the funds rate to 2 percent, is still fully priced.

The FOMC has lowered benchmark lending rates by 3 full points since mid-September, to 2.25 percent from 5.25 percent.

Futures now show only an 78 percent chance that the Fed will lower its benchmark lending rate to 1.75 percent by June FFN8 after fully pricing such a move on Wednesday.