As inflation cools, the Federal Reserve is expected to switch to rate cuts in May

After a U.S. government report showed consumer prices unchanged in October from a year earlier, traders on Tuesday bet that cooling inflation would prompt the Federal Reserve to forgo more rate hikes, or even start cutting rates before May.

Speaking at the Detroit Economic Club, Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said the report showed consumer prices rose only 3.2 per cent from a year earlier after rising 3.7 per cent in September and "looks pretty good".

He said that while he expressed a desire to see further progress, particularly on housing inflation, CPI inflation fell from around 6.3% in January and looks on track for the fastest peacetime annual decline in more than 40 years.

Goolsby did not update his views on the appropriate path for interest rates on Tuesday, even though he was not among Federal Reserve policymakers advocating for further tightening even before Tuesday's data was released.

Prices of futures contracts settled at the Fed's target rate only reflect a roughly 5% chance that the Fed will raise its policy rate above its current range of 5.25% to 5.50%, down from 28% before the Labor Department report.

Core inflation, which excludes energy and food, rose 4 per cent from a year earlier, the slowest pace in more than two years, the report showed. While still well above the Fed's 2 per cent target, the downward trend could give Fed policymakers more confidence that policy is tight enough to get the job done.

Traders and many analysts certainly agree.

"You can say goodbye to the era of rate hikes," said Brian Jacobsen, chief economist at Annex Wealth Management.

JPMorgan economist Michael Feroli said in a note to clients that the consumer price index (CPI) data further reduced the likelihood of a December rate hike, noting that the data could also affect the central bank's forecast for the next Federal Open Market release. Committee meeting.

Mr. Feroli said the data showed fourth-quarter inflation was lower than the Fed's September FOMC forecast and the unemployment rate rose slightly, "and they may have a hard time offsetting the rationale of the dovish stance with more hawkish points."

At the September meeting of the Federal Reserve, Federal Reserve officials were expected to raise the federal funds rate again, but for now they are unlikely to achieve that goal.

At the same time, based on interest rate futures pricing, the Fed is now seen as very likely to cut rates for the first time in May and leave the short-term base rate a full percentage point lower than it is today by the end of 2024.

The last time the Federal Reserve raised interest rates was in July, but Federal Reserve Chairperson Jerome Powell said last week that he would not hesitate to raise rates further if needed to curb inflation.

Nationwide chief economist Kathy Bostjancic said Tuesday's data eased pressure for further tightening, but U.S. central bankers were unlikely to win.

"The Fed will maintain its tightening bias for now, preferring caution to caution," she wrote.

When policymakers next meet in December, they will receive a report on inflation this month, as well as an update on the job market, which also cooled more than economists expected last month, with the unemployment rate rising to 3.9 percent and wages rising at the slowest pace in nearly 2-1/2 years.