Traders boost bets on December 2016 Fed rate hike

February 5, 2016 09:14 AM

The Federal Reserve is much more likely to raise interest rates this year, traders bet on Friday, after a government report showed a long-awaited surge in wages in January and an unemployment rate at an eight-year low.

U.S. short-term interest-rate futures contracts slipped on the sign of labor market strength, suggesting traders are now pricing in about a 45% chance that the U.S. central bank will next raise rates in December, up from 20% before the report.

They had earlier expected the Fed to wait until well into next year before raising rates, on worries that a global market selloff sparked by slowing growth in China could create headwinds to the U.S. recovery and push inflation even farther below the Fed's 2-percent goal.

With average hourly earnings rising 0.5% in January, the report "makes the case that inflation is possible in the U.S. against the backdrop of a lot of the financial turmoil that we’ve been seeing," said Aaaron Kohli, interest rate strategist at BMO Capital Markets in New York.

The Fed raised rates for the first time in nearly a decade in December, and projected it could raise rates another four times this year as the U.S. economy strengthened. Most economists see that scenario now as overly aggressive, and since January traders had begun to bet against even one rate hike this year.

Traders are still pricing just a 10% chance of a rate hike in March, the next time Fed policymakers meet.

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