Yellen sends odds of rate hike below 50%

Money-market futures traders cut the odds of a Federal Reserve interest-rate increase below 50 per cent until December after Chair Janet Yellen lowered her outlook for growth and the pace of policy tightening.

The likelihood that policy makers will lift their benchmark rate from near zero in September fell to 39 per cent from 55 per cent on Tuesday, according to calculations by Bloomberg using federal fund futures contracts. Futures traders have wiped out the chance of an increase in June, assigning it an 11 per cent probability.

While the policy-setting Federal Open Market Committee dropped a commitment to be "patient" when raising rates, a key shift was policy makers' lowering of their median estimate for benchmark borrowing costs during the next two years, according to Brian Smedley, an interest-rate strategist at Bank of America Corp in New York. The fresh set of estimates reduced the median for the federal funds rate at the end of 2015 to 0.625 per cent, compared with a December forecast of 1.125 per cent.

"The Fed wants to communicate that a normalisation process will be slow and the Fed wants to continue to provide support to the recovery," Smedley said.

Rate slide
The slide in money-market rates Wednesday kept in place a gap between the market and the Fed's outlook that has existed for more than a year. The implied yield on December 2015 Fed funds futures contracts fell 0.1 percentage point to 0.42 per cent. Yields on the December 2016 contract declined 0.21 percentage point to 1.15 per cent.

Eurodollar futures, which are used to speculate on the path of the Fed's policy rate, signal that traders estimate the policy rate reaching a peak rate of 1.93 per cent by the end of 2018, down from 2.14 per cent priced-in on Tuesday. Fed officials project the long-run policy rate at 3.75 per cent.

The Fed's statement that interest-rate increases will be appropriate only when inflation moves closer to its 2 per cent target is prompting traders to adjust expectations.

"The signal from the slower pace of normalisation underlines the concern about the sluggishness on the inflation story," Smeldley said.