August 22, 2019 / 8:43 PM / a month ago

MONEY MARKETS-Hawkish Fed remarks quell bets on deep U.S. rate cut

(Updates market action, adds graphic, background)

By Richard Leong

NEW YORK, Aug 22 (Reuters) - U.S. interest rates futures fell after two Federal Reserve officials said on Thursday they did not see a case for another U.S. rate decrease, holding down bets the U.S. central bank would consider a deep rate cut next month.

Kansas City Fed President Esther George and Philadelphia Fed President Patrick Harker said the Fed need not deliver more economic stimulus now, following a rate cut for the first time in more than a decade in July.

Their hawkish views failed to shake traders’ conviction that the central bank needs to lower rates again at its September meeting to counter risks from a softening global economy and U.S.-China trade tensions.

Traders now see another quarter-point cut as the Fed’s most likely next move, according to CME Group’s FedWatch tool. They no longer see an aggressive half-point one as a possibility.

Traders and analysts expect Fed Chairman Jerome Powell to signal that at least one more rate cut is likely. He is scheduled to deliver a speech at an economic symposium in Jackson Hole, Wyoming at 10 a.m. (1400 GMT) on Friday.

“We expect the speech to tilt dovishly by reflecting adverse developments since the July FOMC,” Ebrahim Rahbari, chief G10 FX strategist at Citi, wrote in a research note.

A day after the Fed’s July 31 rate cut, U.S. President Donald Trump stunned investors with a threat he would impose 10% tariffs on $300 billion worth of Chinese imports starting Sept. 1.

China responded by allowing its currency to weaken its lowest level against the dollar in more than a decade, and said through state media that local firms had suspended U.S. agricultural purchases.

U.S. manufacturers have felt the pinch of the spat between the world’s biggest economies.

IHS Markit said earlier Thursday its “flash” or preliminary measure on domestic factory activity fell to 49.9 in August, the lowest since September 2009. This compared with a final reading of 50.4 in July.

A reading below 50 means the manufacturing sector is contracting.

Late Thursday, interest rates futures implied traders see a 93.5% chance of a quarter-point rate cut at the Fed’s Sept. 17-18 policy meeting, down from 98.5% from late on Wednesday but up from 68.5% a week ago, CME’s FedWatch showed.

They suggested traders saw nearly nil chance of a half-point decrease, down from 1.5% Wednesday and 32.5% a week earlier.

Reporting by Richard Leong Editing by Chizu Nomiyama and Richard Chang

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