May 13, 2019 / 6:54 PM / 4 months ago

MONEY MARKETS-Traders raise U.S. rate-cut bets on growing U.S.-China trade friction

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NEW YORK, May 13 (Reuters) - Interest rate traders increased their bets the U.S. Federal Reserve would lower interest rates by year-end to counter a domestic slowdown stemming from an escalation in the trade conflict between China and the United States.

On Monday, Beijing said it plans to set import tariffs ranging from 5% to 25% on 5,140 U.S. products on a revised $60-billion target list. It said the tariffs will take effect on June 1.

China’s retaliatory measure came in the wake of Washington’s tariff increase on $200 billion of Chinese imports on Friday as talks between the world’s biggest economies unexpectedly broke down. U.S. President Donald Trump has said the Chinese government backtracked on commitments it made during months of negotiations.

Analysts worry the tension between two parties would spiral into a trade war that would harm the global economy.

“If growth concerns were coupled with a major correction in equity markets the Fed would certainly be pushed closer to cutting interest rates,” Andrew Hollenhorst, Citi chief U.S. economist, wrote in a research note.

At 2:44 p.m. (1844 GMT), federal funds futures implied traders saw about a 70% chance the U.S. central bank would lower the target range on short-term rates by a quarter point to 2.00%-2.25% at its Dec. 10-11 policy meeting. This compared with a 64% implied likelihood late on Friday, according to CME Group’s FedWatch program.

A month ago, futures prices suggested traders saw a 40% likelihood of a quarter-point rate decrease. (Reporting by Richard Leong Editing by Nick Zieminski)

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