Bonds News

US RATE FUTURES-Dealers take Fed at its word on low rates

(Adds details, market comments)

CHICAGO, Sept 23 (Reuters) - Financial dealers pushed back the expected timing of potential Federal Reserve rate hikes after the U.S. central bank on Wednesday suggested the economic recovery now under way will be slow.

In short-term interest rate futures, the implied prospects for a Fed rate increase in April dropped to 88 percent after the Federal Open Market Committee meeting.

Earlier, futures had fully priced a rate hike in April, to 0.5 percent from the current range of zero to 0.25 percent. The first potential rate hike is not fully priced until June.

“The underlying message from the Fed is that policy on rates is not going to change any time soon,” said Rudy Narvas, economist at 4CAST Ltd in New York. “Caution remains the mode du jour of the Fed.”

In the statement issued on Wednesday after its two-day policy meeting, the Federal Open Market Committee said interest rates were likely to stay very low for an extended period.

Household spending, a key ingredient of U.S. economic strength, remains constrained by ongoing job losses, lower housing values and tight credit, the FOMC said.

The Fed has already held rates at a rock-bottom level since December 2008, and has a raft of other programs in place to boost lending markets and trigger a recovery.

“The current stabilization has only recently taken hold, and Chairman Bernanke does not want to do anything to damage this,” said Doug Roberts, chief investment strategist at Channel Capital Research in Shrewsbury, New Jersey.

San Francisco Fed President Janet Yellen last week described views on the inflation outlook as unusually polarized at the moment.

But the FOMC statement suggested that the Fed’s low-inflation, or even disinflation, wing is holding sway against other Fed policy-makers who fear an outbreak of inflation.

“With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time,” the statement said.

“There is no threat from inflation any time soon. That part is pretty anti-climactic,” said Colin Lundgren, head of institutional fixed income at RiverSource Investments in Minneapolis.

The downgrading of prospects for rate increases put futures values more in line with many economists who expect the Fed to be on hold until deep into 2010 or into 2011.

“We still feel very comfortable with our call for no change in the fed funds target range until at least the first quarter of 2011,” said Narvas at 4CAST. (Editing by James Dalgleish)