Fed Rate-Increase Odds Tumble Amid Trader Capitulation

Two months ago, a Federal Reserve interest-rate increase in September looked like a sure thing, based on futures prices. Now, it’s a long shot.

Rates on federal fund futures show the probability of a September 2015 rate increase fell to 30 percent, down from 46 percent yesterday and 67 percent two months ago, according to data compiled by Bloomberg. The chances for an increase in December 2015 were 54 percent, making it the first instance for a likely central bank move.

“The market has now fully priced out a September hike,” Millan Mulraine, deputy head of U.S. research and strategy at Toronto-Dominion Bank’s TD Securities unit in New York, wrote in a note.

Treasuries rallied and short-term interest rates fell after a report showed retail sales in the U.S. dropped more than forecast in September. The 0.3 percent decrease followed a 0.6 percent August gain that was the biggest in four months, Commerce Department figures showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg called for a 0.1 percent decline.

Fed policy makers raised their median estimate last month for the federal funds rate to 1.375 percent by the end of next year, compared with a June forecast of 1.125 percent. The rate has been in a range of zero to 0.25 percent since December 2008.

The implied yield on the December 2015 Eurodollar contract, the world’s most actively traded futures, traded at 0.650 percent, down from 0.8 percent yesterday and 1.065 percent a month ago.

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