(Adds latest on federal funds rate)
Nov 7 (Reuters) - A key gauge of what banks charge each other to borrow dollars for three months increased to its highest level in a decade on Wednesday ahead of the U.S. Federal Reserve’s two-day policy meeting that will begin later in the day.
The London interbank offered rate to borrow three-month dollars climbed nearly 1 basis point to 2.60113 percent following a 0.2 basis point gain on Tuesday.
Three-month LIBOR has risen in 15 of the last 16 sessions, prompted by the Fed’s rate hikes, rising U.S. government borrowing and a shrinking Federal Reserve balance sheet.
LIBOR is the benchmark rate for $200 trillion of dollar-denominated financial products, mainly interest rate swaps and floating-rate loans.
Fed policymakers are not expected to raise key short-term interest rates at their upcoming meeting, but traders waited for any clues about possible rate increases in December and in 2019.
The futures market implied traders saw little chance the Fed would lift its target range on short-term rates, currently at 2.00-2.25 percent, according to CME Group’s FedWatch program.
The “effective” or average rate on federal funds, what banks charge each other to borrow excess reserves overnight, remained at 2.20 percent for a second day.
The effective fed funds rate stayed at parity with what the Fed pays banks on the excess reserves they leave with the central bank (IOER). There have been concerns that the fed funds rate would rise above IOER, which may raise worries about whether Fed policy-makers are losing their grip on monetary policy.
Reporting by Richard Leong in New York; Editing by Jeffrey Benkoe and Susan Thomas