June 12, 2017 / 2:13 PM / 6 months ago

MONEY MARKETS-Traders unsure on U.S. rate increase after June

* Traders seem nearly certain of U.S. rate increase this week

* Softening inflation data cast doubts on further rate hikes

* View of another rate hike not fully priced until late 2018

By Richard Leong

NEW YORK, June 12 (Reuters) - U.S. interest rates futures were little changed on Monday with traders seeming uncertain whether the Federal Reserve would embark on a third interest rate increase in 2017 due to recent signs of inflation softening.

Rates futures prices matched Wall Street’s consensus that Fed policymakers would raise key overnight borrowing costs by a quarter point to a target range of 1.00-1.25 percent at their upcoming two-day meeting that begins on Tuesday.

However, they implied traders have not fully priced in the Fed’s target range on rates reaching 1.25-1.50 percent until late 2018.

The Federal Open Market Committee, the central bank’s policy-setting group, previously raised rates in March, marking only its third hike since ending its near zero rate policy in December 2015.

Speculation on the timing of the Fed’s next rate increase after a possible one to be announced in Wednesday comes as traders await more information on the Fed’s plan to shrink its $4.5 trillion balance sheet.

They will also monitor any changes in policymakers’ outlook on inflation and rate increases.

While Wall Street’s top firms widely expect the Fed to raise rates one more time before the end of 2017 after Wednesday, they are split on whether it would happen in September or December, a Reuters poll conducted on June 2 showed.

“Details of balance sheet plans potentially released at the June meeting may affect the probability of a September versus a December announcement and associated rate hike ‘pause,'” Citi economists Andrew Hollenhorst and Ebrahim Rahbari wrote in a research note on Monday.

The FOMC will release its policy statement at 2 p.m. (1800 GMT) on Wednesday, along with Fed officials’ latest quarterly economic and rate estimates. An half hour later, Fed Chair Janet Yellen is scheduled to appear at a press conference.

At 9:31 EDT (1331 GMT), federal funds futures implied traders priced in a 96 percent probability of a rate hike to 1.00-1.25 percent later this week, unchanged from Friday’s close , CME Group’s FedWatch tool showed.

They suggested traders saw about a 24 percent chance of rates rising to 1.25-1.50 percent at the Fed’s Sept. 19-20 meeting and a 53 percent chance of such a move at its Dec. 12-13 meeting .

Reporting by Richard Leong; Editing by Andrea Ricci

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