(Adds details, comments from Fed official, analyst comments)
By Richard Leong and Sam Forgione
NEW YORK, Feb 27 (Reuters) - Prices of U.S. short-term interest rate futures fell on Monday as traders raised their expectations the Federal Reserve will increase rates either in March or May after a central bank official said a hike may happen soon.
The Fed might need to raise rates in the near future to avoid falling behind the curve on inflation, Dallas Fed President Robert Kaplan said.
"Sooner rather than later means in the near future," Kaplan told reporters after speaking at an event with university students in Norman, Oklahoma.
In recent weeks, Kaplan and several other Fed officials have raised the possibility the U.S. central bank may increase rates at a faster pace if the job market improves further and inflation moves even closer to the Fed's 2 percent goal.
The Fed last raised rates in December to a target range of 0.50-0.75 percent.
Kaplan's comments, together with bets U.S. President Donald Trump will offer specifics on tax cuts, looser regulations and infrastructure spending he promised during his campaign last year, knocked the prices of March and May fed funds to multi-month lows.
Trump is scheduled to speak to a joint session of Congress on Tuesday.
“What the market reacted to was a combination of (Kaplan’s comments) with the fact that we might be getting signs that legislation may be sooner rather than later on things like tax reform and infrastructure, and that’s all very growth positive," said Priya Misra, head of global rates strategy at TD Securities in New York.
March fed funds futures ended down 2 basis points at 99.285 after earlier hitting 99.2775, their lowest since June.
They suggested traders saw about a 36 percent chance the Fed will raise rates by a quarter point at its March 14-15 policy meeting, higher than 27 percent at Friday's close, CME Group's FedWatch program showed.
May fed funds settled down 2 basis points at 99.175 after touching their lowest level in about 11-1/2 months. They implied traders saw roughly a 55 percent chance the Fed would raise rates to at least 0.75-1.00 percent, up from 52 percent on Friday, according to CME's FedWatch.
Soft spots remain in the U.S. economy, including wages and capital investments as well as uncertainties around upcoming European elections, which may warrant the Fed sticking to a gradual pace on rate hikes, analysts said.
"Sellers have to beware," said Todd Colvin, senior vice president at Ambrosino Brothers in Chicago. (Reporting by Richard Leong and Sam Forgione; Editing by Nick Zieminski and Meredith Mazzilli)