Futures Traders Pare Bets on Rate Increase in 2006

Bloomberg reports:

Futures traders pared bets that the Federal Reserve will boost its overnight lending rate between banks by year-end after the central bank ended its streak of 17 consecutive increases.

The yield on the federal funds futures contract for December fell 2.5 basis points, or 0.025 percentage point, to 5.335 percent at the Chicago Board of Trade. It suggests a 53 percent chance of an increase to 5.5 percent from 5.25 percent by the end of the year, down from 68 percent yesterday.

Traders over the past two weeks backed off what they considered almost certain interest-rate increases this year after increasing unemployment and a cooling housing market overtook worries about inflation. If they make the wrong call, Fed policy makers may have to clamp down harder in coming months and risk smothering the economic expansion.

``This is an awfully big gamble by the Fed,'' said John Brady, an interest-rate broker for Man Financial Inc. at the Chicago Mercantile Exchange. ``If the inflation genie remains out of the bottle, the Fed will have quite a job ahead of it because it will have to rebuild some of its anti-inflation credibility.''

Something to think about.