Traders exit bets on Fed rate hike before 2014

CHICAGO (Reuters) - Traders exited bets the Federal Reserve could raise interest rates before January 2014, after the U.S. central bank moved to ease monetary policy by signalling it expects to hold rates near zero more than a year longer than it had previously promised.

Futures on the federal funds rate - the rate at which banks lend to each other overnight and the Fed's traditional monetary policy lever - surged after the Fed said it will likely not raise interest rates before late 2014. At its last policy-setting meeting, the Fed said it expected to keep rates extraordinarily low until at least mid-2013.

"This is a more dovish statement than expected," said David Sloan, economist for IFR Economics, a unit of Thomson Reuters.

The president of the Richmond Fed, Jeffrey Lacker, was the sole dissenter on Wednesday, preferring to omit an expected time frame for low rates.

Fed funds futures contracts maturing in February 2014, which had priced in about a 20 percent chance of a rate hike by the Fed's January 2014 meeting, jumped after the announcement. They now are pricing in no chance of higher rates.

Contracts maturing later in the year are much less liquid and did not trade immediately after the decision. Asking prices at the Chicago Board of Trade suggested traders see no to little chance of a rate hike through mid-2014.

(Reporting by Ann Saphir; Editing by James Dalgleish)