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UPDATE 1-Trump's tariff threat stokes bets on more U.S. rate cuts

Ann Saphir

(Updates market action, background)

Aug 1 (Reuters) - U.S. interest rate futures rallied on Thursday as traders piled on bets that the Federal Reserve will need to further cut interest rates after President Donald Trump said he will slap 10% tariffs on $300 billion on Chinese goods starting Sept. 1.

Traders are now pricing in two more interest rate cuts by year's end, and are increasing bets the Fed will need to ease policy further next year to offset risks from the escalating trade war.

"Trade talks are continuing, and during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%," Trump wrote on Twitter.

Trump's latest move echoed what happened in May when he imposed 25% tariffs on $200 billion of Chinese goods in a bid to pressure the world's second biggest economy for a trade deal.

That decision touched of a flood of bets the Fed would cut rates multiple times in the coming months as policy-makers would scramble to avert a recession.

The U.S. central bank delivered its first rate decrease since 2008 on Wednesday.

However, traders had thrown in the towel on the idea of more than a couple more Fed rate cuts, after Fed Chairman Jerome Powell said he did not see a lengthy rate-cutting cycle ahead.

Federal funds futures implied traders now see a 70% chance the Fed would lower rates again in September, up from 51% late on Wednesday, CME Group's FedWatch tool showed.

The fed funds complex suggested traders are rebuilding bets on a possible third rate cut by year-end with an implied 60% chance for such a move, which was up from 39% late Wednesday. (Additional reporting by Richard Leong; editing by Leslie Adler and Tom Brown)