September 26, 2018 / 6:49 PM / in 21 days

UPDATE 2-Traders keep bets on U.S. Fed's 2019 interest rate rises

(Updates market action, adds quote)

By Ann Saphir and Richard Leong

Sept 26 (Reuters) - Interest rates futures traders on Wednesday stuck with bets the Federal Reserve will raise rates once more this year and two times next year even after the central bank released forecasts flagging a slightly steeper rate rise path.

Contracts tied to the Fed’s policy rate that are traded at CME Group’s Chicago Board of Trade rose in the wake of the Fed’s expected third rate increase in 2018 on Wednesday and after Fed Chairman Jerome Powell’s upbeat comments on the economy after the Fed’s two-day meeting.

The higher pricing in the contracts was not large enough to alter traders’ expectations for a Fed rate hike in December, which would bring it to a target range of 2.25 percent to 2.50 percent. It implied traders expect two more rate increases in 2019.

Fed forecasts released on Wednesday showed Fed policymakers themselves view three rate hikes as likely needed next year.

“The projected path on interest rates is the same,” said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York. “I think a December hike is pretty well baked in.”

Meanwhile, policy-makers ended their long-running characterization of their policy stance as “accommodative.”

The Fed “is probably close to being done raising rates even though they flagged a few more hikes,” said Mark McCormick, head of TD Securities’ North American FX strategy.

With unemployment at 3.9 percent, well below what most Fed officials view as sustainable in the long run, inflation was still expected to creep only slightly above the central bank’s 2.0 percent target, Fed forecasts released Wednesday show.

Fed policymakers did not jack up their expectations for rate hikes in coming years, as some analysts had thought, instead sticking closely to rate hike path forecasts outlined in June that envision short-term rates, now at 2.0 percent to 2.25 percent, to be at 3.1 percent by the end of next year.

Their latest rate projections, together with Powell’s comment that the Fed does not expect upside surprise on inflation, spurred a wave of buying in longer-dated Treasuries.

This trade flattened the yield curve, narrowing the spread between two-year and 10-year Treasury yields to just a tad less than 23 basis points, which was the tightest level in more than a week. (Additional reporting by Gertrude Chavez-Dreyfuss Editing by Chizu Nomiyama)

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