Fed seen raising rates in October as job market firms

Fri Jun 5, 2015 10:42am EDT
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By Ann Saphir

(Reuters) - After an unexpected surge in U.S. job gains in May, traders are now betting the Federal Reserve will start raising interest rates as soon as October, and will make a second increase early next year.

Traders see a 53-percent chance that the first Fed rate hike will come at the Fed's second-to-last meeting of the year, based on CME FedWatch, which tracks rate hike expectations using its Fed funds futures contracts. They see a better-than-even chance that the Fed will have chalked up two rate increases by its January meeting, the same contracts suggest.

Before Friday's report on May jobs, traders appeared convinced that the Fed would need to wait until at least December and perhaps into next year before removing any of its monetary policy accommodation.

An October rate hike had been given worse than even odds, based on the fed funds futures contracts.

"A lot of people have been saying 2016 lately, but now if this continues it’s likely to pull that back well back into 2015," said Russell Price, a senior economist at Ameriprise Financial in Troy, Michigan.

Traders of fed funds futures still discount a September rate hike, the timing preferred by most Wall Street economists, with contracts pricing in just a 34-percent chance of a rate hike then.

The U.S. unemployment rate rose to 5.5 percent in May, from 5.4 percent a month earlier, but investors saw the increase as a sign of labor market strength because it reflected growing optimism over jobs as more people who had been sidelined launched back into the job hunt.

Payrolls increased by 280,000, the biggest gain this year.   Continued...

Traders work on the floor of the New York Stock Exchange shortly after the opening bell June 2, 2015.  REUTERS/Lucas Jackson