December 14, 2016 / 7:43 PM / 8 months ago

UPDATE 1-Traders, in rare sync with Fed, see three rate hikes in 2017

(Updates probabilities, adds background)

By Ann Saphir

SAN FRANCISCO, Dec 14 (Reuters) - Traders of U.S. short-term interest rate futures are pricing in a faster pace of Federal Reserve interest rate hikes next year after policymakers raised their benchmark rate and signaled they expect to raise it three more times next year.

It is a moment of rare agreement between rate traders and the Fed, which for the past year have diverged on how fast the central bank would raise rates as the economic recovery continued.

The Fed repeatedly anticipated a faster pace of rate hikes than markets did, and than it ultimately delivered. Last December, for instance, Fed officials had signaled they expected to raise rates four times in 2016; they managed to hike rates only once.

Meanwhile, traders consistently bet on a more gradual path of rates hikes, and Fed officials had to repeatedly lower their expected rate hike path, putting their forecasts more in line with traders.

On Wednesday, the tables turned.

Fresh Fed forecasts show policymakers now see three rate hikes in 2017 as the appropriate path, up from the two they expected back in September. Traders reacted quickly, sending down the price of fed funds futures contracts traded at CME Group Inc's Chicago Board of Trade.

Before the Fed decision at the conclusion of a two-day policy meeting, traders were pricing in one to two rate hikes next year. Now they see three rate hikes as likely, the same path seen by the Fed. (Reporting by Ann Saphir; Editing by G Crosse and Leslie Adler)

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