Traders see Fed rate hike in Dec 2011

CHICAGO (Reuters) - Short-term interest rate futures traders deferred expectations that the Federal Reserve will tighten monetary policy until December 2011, after policymakers on Tuesday said the Fed stood ready to provide more support to the recovery.

Policymakers at the U.S. central bank expressed greater concern about the sluggish pace of economic growth and uncomfortably low inflation than when they last met in August and left intact their commitment to keeping rates low for an extended period.

Traders now see December 2011 as the first Fed meeting at which policymakers are more likely than not to increase their target rate for overnight lending between banks, trading in Fed funds futures at CME Group Inc's CME.O Chicago Board of Trade showed.

Earlier on Tuesday, traders were pricing in about a 61 percent chance of a rate hike at the Fed’s November 2011 meeting. After the Fed released its statement, traders gave it a 40 percent chance.

Fed funds futures traders expect the Fed to keep its target rate below 1 percent until at least August 2012, trading in the contracts show.

Short-term interest rate futures that expire in the next few months barely budged after the Fed’s statement, suggesting traders are betting if the Fed were to provide any additional monetary support, there would be little impact on overnight lending rates, which are already near zero.

The Fed currently targets the benchmark rate between zero and 0.25 percent, and this month it has averaged about 0.20 percent.

Reporting by Ann Saphir; Editing by Padraic Cassidy