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Fed rate hike seen in June 2015 as traders hedge against taper

By Ann Saphir

SAN FRANCISCO, Dec 12 (Reuters) - Traders boosted bets Thursday that the U.S. Federal Reserve will deliver its first rate hike in years by June 2015, as recent signs of an economic pickup nudge the U.S. central bank closer to easing off the monetary gas pedal.

As recently as two weeks ago, traders saw little chance of a rate hike until September 2015, based on short-term rate futures traded at CME Group's Chicago exchanges. On Thursday they saw about a 50 percent chance of a June 2015 rate hike, up from about 42 percent on Wednesday.

Most economists still expect Fed policymakers to defer any reduction to their $85-billion-a-month in bond buying stimulus until next January or March.

But stronger-than-expected job creation and retail sales mean more are hedging against the chance of the Fed beginning to withdraw stimulus at its meeting next week, a move that could translate into a slightly earlier first rate hike.

The idea of a December taper "at least has enough credibility that (traders) have to acknowledge it," said Lou Brien, a strategist at Chicago-based DRW Trading. "People are getting their house in order for something that hadn't necessarily been priced in."

Still, he said, markets are still mostly buying Fed Chairman Ben Bernanke's message that reducing the bond-buying program does not mean that a rate rise is around the corner.

Fed policymakers are keen on making that message stick, fearing that if traders start to price in a rate rise faster than the Fed itself plans, higher long-term borrowing costs could undercut the Fed's stimulus efforts.

Most Fed officials see no rate hike until 2015, and they will release fresh forecasts at the end of their Dec. 17-18 policy-setting meeting.

Any breakdown in that belief, with traders adding to bets that the Fed may start to raise rates even earlier in 2015, could pose a stumbling block to a Fed eager to get started on a return to policy normalcy.

That's one reason that economists increasingly expect the Fed next week to strengthen its promise to keep rates low for long. Indeed, half of top Wall Street economists polled by Reuters expect the Fed to vow low rates until unemployment - now at 7 percent - falls to at least 6 percent, a half a percent lower than it currently promises.

With millions of put options on Eurodollar futures set to expire at the Chicago Mercantile Exchange on Friday, traders are making purchases of new puts to replace expiring ones, said John Brady, managing director of global futures at RJ O'Brien in Chicago, essentially re-upping on insurance against a Fed taper.

"As economic Armageddon not only failed to show up but the economy actually accelerated, the are risks greater than otherwise that the Fed begins to taper," Brady said.

Added to that, he said, is the unexpected news this week that former Bank of Israel chief Stanley Fischer has been asked to take the No. 2 spot at the Fed once Vice Chair Janet Yellen takes the reins from Fed Chair Ben Bernanke, whose terms ends early next year.

The U.S. Senate is expected to approve Yellen's nomination as Fed chair sometime next week.

Fischer's recent comments suggest he is skeptical of relying on so-called forward guidance to assure markets the Fed will keep rates low until well after it stops buying bonds.

If the Fed backs away from forward guidance as a result, Brady said, "What it would do is unanchor the front end of the curve a bit more."