Fed's Brainard remarks reduce bets of U.S. rate hike next week

Federal Reserve Governor Lael Brainard attends the Federal Reserve's ninth biennial Community Development Research Conference focusing on economic mobility in Washington April 2, 2015. REUTERS/Yuri Gripas

(Reuters) - U.S. interest rate futures prices rose on Monday, diminishing the implied probability of a rate hike by the U.S. central bank next week, after Federal Reserve Governor Lael Brainard warned against a rush to raise interest rates.

The comments from Brainard had been highly anticipated through the day as she will be among the last Fed officials to speak before they enter their quiet period ahead of their next policy meeting on Sept 20-21.

Some analysts raised the probability Brainard, who is known for her easy policy stance, would use Monday’s speech to hint the central bank would raise interest rates next week from its current target range of 0.25-0.50 percent.

“This hypothesis always struck me as preposterous,” Stephen Stanley, chief economist at Amherst Pierpont Securities, wrote in a research note. “She spins any fact, positive or negative, as a reason to stay easy.”

In her speech to the Chicago Council on Global Affairs, Brainard cautioned against raising interest rates too quickly due to potential weakness in the labor market and risks of economic weakness overseas.

“Today’s new normal counsels prudence in the removal of policy accommodation,” she said.

Brainard’s remarks pushed prices for federal funds futures higher across the board. Higher prices imply a lower probability of an increase in interest rates.

The September fed funds contract FFU6 gained an additional 1.0 basis point following her comments. That implies a probability of just 15 percent that the Federal Open Market Committee will lift rates next week, compared with a probability of 24 percent at the close of trading on Friday, according to CME Group's FedWatch program.

December's contract FFZ6 rose 2 basis points, suggesting about a 55 percent chance of a rate hike at that month's meeting, compared with about 60 percent on Friday.

Reporting By Dan Burns and Richard Leong; Editing by Chizu Nomiyama and Cynthia Osterman