NEW YORK: Short-term US interest rates futures rose on Wednesday, fueled by the view the Federal Reserve would cling to an ultra-easy monetary policy on concerns high gasoline prices and Europe's debt trouble could derail the US economy.
Moreover, the Fed is still actively holding down mortgage rates and other borrowing costs with its $400 billion bond program, nicknamed "Operation Twist," analysts and traders said.
Most contracts on future deliveries of dollar interbank loans were up 0.5 basis point to 6.5 basis points on light volume. Despite the day's gains, they have been stuck in a tight range.
"We are in a sideways holding pattern here," said Alex Manzara, vice president at TJM Futures in Chicago.
Fed policy-makers are scheduled to meet next Tuesday and Wednesday, while other major central banks are signaling reluctance to ease their monetary policies further.
The Bank of England is poised to turn off its money-printing press in May, fearful that inflation will now be higher than expected and prepared to gamble that Britain's economic recovery remains on track.
Minutes of the BOE's April meeting, combined with a warning on inflation from deputy governor Paul Tucker, signaled a sharp change in tone that could bring forward expectations for interest rate rises.
A day earlier, the Bank of Canada surprised the market by suggesting it might need to begin hiking interest rates.
Perceived hawkish signals from British and Canadian central banks have not altered the consensus view on the Fed's own policy stand which is that it would leave policy rates near zero and refrain from buying more bonds for now, analysts said.
"The minutes from the last meeting revealed little appetite among Fed officials for a new round of asset purchases," research firm Capital Economics said in a research note on Wednesday. "The Fed's best option is to stay on the sidelines waiting to see which way the recovery breaks."
Despite a disappointing report on March payrolls earlier this month, the Fed has not hinted it is gearing up for a third round of large scale bond purchases after the end of Operation Twist in June.
"It has been well telegraphed that the prospect for more quantitative easing will be quite limited," TJM's Manzara said.
Federal funds futures, which gauge expectations on what banks charge each other to borrow excess reserves, suggest traders do not expect the Fed would increase key short-term rates until the second half of 2014.
Eurodollar futures signal traders anticipate any rise in short-term US rates would be gradual.
As this low-rate outlook persists, overnight cash rates remain stable, as more dollars have become available after the settlement of last week's Treasury debt supply on Monday and the filing deadline on personal income tax filing on Tuesday.
The interest rate on overnight repos was last bid at 0.22 percent, a tad lower than 0.23 percent on Tuesday.
The benchmark London interbank offered rate on three-month dollars was unchanged for a third day at 0.46565 percent.
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