Traders see late 2016 U.S. rate hike after Yellen

NEW YORK (Reuters) - U.S. federal funds futures rose on Tuesday, implying traders now expect the Federal Reserve will not raise interest rates until late 2016 following Fed Chair Janet Yellen’s remarks that the U.S. central bank would proceed “cautiously” with rate increases.

U.S. Federal Reserve chair Janet Yellen (R) is applauded before speaking to the Economic Club of New York in New York March 29, 2016. REUTERS/Lucas Jackson

Her speech contrasted with recent comments from some top Fed policymakers who said the U.S. economy is growing enough to warrant further rate increases later this year despite global risks on the U.S. economic expansion.

“Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy,” Yellen said on Tuesday in prepared remarks to the Economic Club of New York.

Prior to Yellen’s remarks, San Francisco President John Williams was the latest Fed official who reckoned the U.S. economy was on track for a gradual path of rate hikes.

“My view is essentially, ‘Let’s just stay on track. Let’s not get sidelined by the noise and distraction commentary can sometimes cause,’” Williams said earlier on Tuesday in a speech in Singapore.

Futures on the U.S. interbank borrowing cost that the central bank targets suggested traders see the Fed holding rates at the current 0.25-0.50 percent target until the fourth quarter.

Fed funds futures implied traders now see a 40 percent chance the Fed would raise rates by a quarter point at its July policy meeting FFN6, lower than the 51 percent late on Monday, according to CME Group's FedWatch program.

They suggested traders placed a 47 percent likelihood of a rate hike in September FFU6, less Monday's 63 percent.

They FFX6 also implied traders see a 52 percent of a rate increase in November, down from 68 percent late Monday.

By December FFZ6, traders placed a 63 percent probability on a rate increase, compared with 75 percent on Monday.

Reporting by Richard Leong; Editing by Dan Grebler