Money Markets: Traders see U.S. rate hike as a sure thing in December

By Richard Leong

NEW YORK (Reuters) - Traders bet on Tuesday that an interest rate increase by the Federal Reserve next month is a near lock following stronger-than-expected economic data and expectations of big tax cuts and federal spending under the Trump administration.

This level of market certainty about rate increases was last seen during the 2004-2006 rate hike cycle when the central bank, under then Fed Chairman Alan Greenspan, raised rates at every policy meeting, analysts said.

During that rate cycle, the Fed raised the federal funds rate to 5.25 percent from 1.00 percent.

"An isolated rate hike doesn't amount to beans. The important thing is more about communication of Fed policy in the medium and long term," said Lou Brien, market strategist at DRW Trading in Chicago.

U.S. interest rates futures on Tuesday signaled traders anticipate the central bank may also consider a rate hike in mid-2017 if does raise rates in December.

Federal funds futures for December delivery implied traders briefly priced in a 100 percent chance the Fed would increase the target range on short-term rates by a quarter point to 0.50-0.75 percent at its Dec. 13-14 policy meeting. They moved later back to late Monday's 95 percent, the CME Group's FedWatch program showed.

Traders saw about a 53 percent probability the Fed would lift short-term rates to at least 0.75-1.00 percent in June 2017, little changed from late on Monday, according to CME's FedWatch.

While a further rally in the dollar or international developments could diminish traders' expectations on a rate increase three weeks from now, in recent days Fed policy-makers including Chair Janet Yellen have signaled a rate hike would occur soon if the jobs market improves further and inflation moves closer to the Fed's 2 percent target.

Stock, bond and currency markets, which have moved sharply following Trump's surprise win in the U.S. presidential election on Nov. 8, are vulnerable to knee-jerk reversals even if the Fed delivers on a rate increase, analysts said.

"You do have the risk of 'buy the rumor and sell the fact,'" said John Canavan, market strategist at Stone & McCarthy Research Associates in Princeton, New Jersey.

In early Tuesday trading, Wall Street's three major stock indexes rose to record high with the Dow hitting the 19,000 point milestone. <.DJI> <.SPX> <.IXIC>

The yield on benchmark 10-year Treasury notes retreated further from its 11-month high set last week to 2.31 percent.

The dollar index was flat at 101.07. <.DXY>

(Reporting by Richard Leong; Editing by Chizu Nomiyama and Frances Kerry)

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