(Reuters) -Cooler-than-expected U.S. inflation last month deepened conviction in financial markets on Wednesday that the Federal Reserve will start cutting interest rates by September and deliver a second reduction by the end of this year.
A U.S. government report showed the Consumer Price Index – a measure of underlying inflation – rose just 0.1% in May after a 0.2% rise in April, with overall consumer prices rising 2.4% from a year earlier, up just one-tenth of a percentage point from the prior month and less than the 2.5% economists had expected.
Within minutes of the release, traders of short-term interest rate futures had priced in a 68% chance that the U.S. central bank would cut rates by a quarter of a percentage point by September, compared with 57% before the data. They now also see a still small but rising chance of an earlier rate cut, putting about an 18% probability of that happening in July versus about 13% earlier on Wednesday.
The Fed will almost certainly leave its benchmark interest rate steady in the 4.25%-4.50% range at the end of its two-day policy meeting next week. The policy rate has been in that range since December.
Fed policymakers expect the Trump administration’s tariffs to slow progress toward their 2% inflation target and to weaken the labor market, but feel that as long as the job market holds up – the unemployment rate has been steady at a relatively low 4.2% – they can leave borrowing costs where they are to keep continued downward pressure on inflation.
Uncertainty over the path of tariffs and their effects on the economy remains high. President Donald Trump announced earlier on Wednesday that a U.S.-China trade deal had been struck that would set tariffs on Chinese goods at 55% – lower than the 145% imposed in April but much higher than in recent decades. The U.S. has otherwise struck only one other trade deal, with the U.K., as the clock ticks toward the early July expiration of a 90-day pause on sharply elevated tariffs on imports from most of the rest of the world.
Even so, financial markets breathed a sigh of relief after the inflation data.
“We are still cautious, but many of the risks that were present in early April appear to be receding at this time,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management.
(Reporting by Ann Saphir, Lawrence Delevingne and Lucia Mutikani, Editing by Louise Heavens and Paul Simao)
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