Aug. 4 (Bloomberg) -- Futures traders say another interest- rate increase by the Federal Reserve this year is unlikely after a government report showed U.S. employers added fewer job than forecast in July and the unemployment rate climbed.

The yield on the federal funds futures contract for December fell 8 basis points, or 0.08 percentage point, to 5.325 percent at the Chicago Board of Trade, the lowest in about two months. It suggests a 47 percent chance of an increase to 5.5 percent from 5.25 percent for overnight loans between banks by the end of the year, down from 96 percent yesterday.

``The key is that the Fed expectation of a slowing economy has occurred and maybe faster than they thought it would,'' said Lou Brien, a strategist for Chicago-based DRW Trading Group.

U.S. employers added 113,000 workers in July and the unemployment rate rose to 4.8 percent from 4.6 percent, according to a Labor Department report. Economists expected a gain of 144,000 jobs and 4.6 percent unemployment, based on estimates in a Bloomberg News survey.

``The unemployment rate at 4.8 percent has the market thinking, `pause,' '' said John Brady, an interest-rate broker for Man Financial Inc. at the Chicago Mercantile Exchange.

The yield on the federal funds futures contract for August fell 5 basis points to 5.28 percent. The level signals traders see a 16 percent chance of a quarter-percentage point increase to 5.5 percent at the Fed's policy meeting on Aug. 8, down from 41 percent yesterday.

Convinced

Traders have become convinced over the past six weeks that signs of the slowing U.S. economy will overcome the Fed's fear of inflation. On June 23, traders were 85 percent certain there would be an interest-rate increase next week.

The Fed on June 29 lifted the benchmark interest rate by a quarter-percentage point to 5.25 percent, the highest since January 2001. The next meetings of the Federal Open Market Committee, which votes on the rate moves, are on Aug. 8, Sept. 20, Oct. 25 and Dec. 12.

Futures are agreements to buy or sell assets at a set date and price. Contracts on interest rates are settled in cash. Fed funds futures settle at the fed funds effective rate, which is the average of all overnight rates for the month.

``The contracts are pretty accurate when you get down to the last week,'' said Frank Lesh, a trader and analyst at FuturePath Trading LLC in Chicago. ``This is the last piece of data they've got before the meeting, and it certainly looks like we're going to see that pause.''

An increase in the Fed's target to 5.5 percent would raise the average overnight rate in August to about 5.44 percent. The rate on the fed funds futures contract is derived by subtracting the contract's price from 100.

To contact the reporters on this story: Ann Saphir in Chicago at asaphir@bloomberg.net

Last Updated: August 4, 2006 13:24 EDT