The Federal Reserve is expected to maintain interest rates unchanged next year

Traders bet on Friday that cooling inflation could cause the Federal Reserve to pause interest rate hikes in the coming months, although continued underlying price pressures from strong consumer spending keep the possibility of a rate hike later this year alive.

The personal consumption expenditures price index, the Fed's preferred measure of inflation, rose 3.4 percent in September from a year earlier, while the Fed's core PCE price index rose 3.4 percent from a year earlier, according to a report released Friday by the Commerce Department's Bureau of Economic Analysis. It rose 3.7 percent because of future price pressures. That was down from 3.8 percent in August, but well above the Fed's 2 percent inflation target.

Consumer spending rose 0.7% in September from August, beating economists' expectations.

Still, traders see no chance of the Fed raising its policy rate from its current range of 5.25-5.5 per cent at its rate-setting meeting next week, and less than a 20 per cent chance of raising it at its December meeting. Futures contracts settled at the central bank's target policy rate.