U.S. interest rate futures increased expectations of a Federal Reserve rate cut in June after fresh data showed inflation cooled more than forecast in January.
Futures tied to the federal funds rate — which reflect the cost of overnight lending between banks — now indicate nearly a 70% probability that the Fed will resume cutting interest rates at its June meeting. Before the inflation report was released, markets had priced in a 64% chance of a rate cut.
Despite the shift in expectations for June, the Federal Reserve is still widely anticipated to keep interest rates unchanged at its March policy meeting.
Fed funds futures also suggest approximately 64 basis points of total rate reductions by year-end, compared with about 58 basis points prior to the inflation data.
The latest figures showed that the Consumer Price Index (CPI) rose 0.2% in January, following a 0.3% increase in December. Economists had expected another 0.3% monthly gain. On an annual basis, inflation continued to ease modestly.
Core CPI, which excludes volatile food and energy prices, increased 0.3% in January after rising 0.2% in December, broadly in line with market forecasts.
Market analysts noted that as long as inflation remains contained, attention will likely shift back to labor market conditions. According to Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, the Federal Reserve is expected to approach future rate cuts cautiously, potentially delivering one or two reductions later this year depending on economic developments.
