April 20, 2018 / 6:14 PM / 2 months ago

MONEY MARKETS-Traders see higher chances for three more U.S. rate hikes in 2018

NEW YORK, April 20 (Reuters) - U.S. interest rates futures fell on Friday as traders bet on a greater likelihood the Federal Reserve would raise key short-term borrowing costs three more times in 2018 in the wake of data that showed steady U.S. economic growth.

This week, government data showed home construction rose more than expected in March and industrial output grew at a solid clip last month.

Federal funds futures for December delivery fell to a one-month low, while the fed funds contract for January 2019 set a contract low on Friday.

Based on the prices of the two contracts, they implied traders saw nearly a 44 percent chance the U.S. central bank would raise its policy target range to 2.25-2.50 percent by the end of the year, according to the CME Group’s FedWatch program.

“My anticipation is that the outlook is for continued, solid growth,” Fed Governor Lael Brainard told CNBC on Friday. “The outlook looks consistent to me for continued gradual increases in the federal funds rate.”

The implied probability of three rate hikes by December grew from 39 percent a week ago and 38 percent a month earlier.

In March, the Fed raised key short-term rates by a quarter point to 1.50-1.75 percent.

On Wednesday, the Fed released its latest Beige Book on regional economic conditions which showed the U.S. economy grew at a modest to moderate pace in March and early April.

Moreover, policy-makers last week in the minutes of their March 20-21 meeting expressed more confidence that inflation would reach its 2-percent goal, which would allow further rate increases in the coming months.

Steady business and consumer activity persisted even amid concerns about U.S. trade tension particularly with China.

The yield curve, or the spread between longer-dated and shorter-dated yields, reached its flattest level in more than a decade earlier this week, stoking concerns among traders whether a recession is looming.

Fed officials including New York Fed President William Dudley this week acknowledged the economic risk of a trade war, while some of them downplayed the flattening yield curve as a recession omen.

“Gradual rate hikes are still in order,” said Alex Manzara, vice president at R.J. O’Brien & Associates in Chicago.

Reporting by Richard Leong Editing by Chizu Nomiyama

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