November 2, 2018 / 2:05 PM / 8 months ago

MONEY MARKETS-Traders see higher chance of Fed rate hike after strong jobs data

* Upbeat jobs data seen keeping Fed on track to hike in December

* Three-month LIBOR books biggest weekly increase since March

* Effective fed funds rate, IOER remain at parity (Adds background, quote)

By Richard Leong

NEW YORK, Nov 2 (Reuters) - U.S. short-term interest rates futures fell on Friday, extending an early decline as an upbeat payrolls report for October raised traders’ expectations that the Federal Reserve would raise interest rates next month.

Money market rates rose or remained elevated as traders anticipate more rate increases. They have also risen on heavy Treasury bill supply and the Fed’s shrinkage of its balance sheet, analysts said.

Fed policy-makers, who will hold a meeting next Wednesday and Thursday, are expected to leave short-term borrowing costs unchanged at 2.00-2.25 percent.

Still, the latest jobs figures will likely support the Fed’s case for further rate increases with unemployment rate staying at a 49-year low at 3.7 percent last month and annual wage growth rising to 3.1 percent, the strongest reading since April 2009.

The Fed has raised rates three times so far this year.

“The Fed is on track for a 4th hike on December 19th,” Jennifer Lee, senior economist at BMO Capital Markets, wrote in research note.

At 9:27 a.m. (1327 GMT), federal funds futures implied traders saw about an 79 percent chance the U.S. central bank would raise its target range on short-term rates by a quarter point to 2.25-2.50 percent at its Dec. 18-19 policy meeting. This compared with a 74 percent chance before the release of the latest payrolls data, according to CME Group’s FedWatch program.


A key gauge on what banks charge each other to borrow three-month dollars registered its largest weekly increase since March on Friday.

The London interbank offered rate to borrow three-month dollars climbed nearly 1.1 basis points to 2.59238 percent on Friday. This brought its weekly gain to 7.2 basis points, which was its largest weekly jump since the week of March 23 when it rose almost 9 basis points.

LIBOR is the rate benchmark for $200 trillion of dollar-denominated financial products, mainly interest rate swaps and floating-rate loans.

Moreover, the federal funds rate averaged 2.20 percent on Thursday for an eighth straight day, according to New York Federal Reserve data released on Friday.

The “effective” fed funds rate is the average cost of what banks charge each other to borrow excess reserves overnight.

The effective fed funds rate and the interest the Fed pays banks on excess reserves that they leave with the U.S. central bank (IOER) remained at parity.

The U.S. central bank has been controlling these two rates to conduct its monetary policy.

Reporting by Richard Leong Editing by David Gregorio and Frances Kerry

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