Traders bet Fed rate hikes are over, cuts to start in 2024

By Ann Saphir

(Reuters) – Federal Reserve policymakers are unlikely to raise interest rates again in 2023 and will probably start cutting them early next year, traders bet on Thursday, after a U.S. government report showed consumer prices rose only moderately last month.

Traders of futures tied to the Fed’s policy rate now see less than a 10% chance that the U.S. central bank will increase its benchmark overnight interest rate from its current 5.25%-5.50% range at a Sept. 19-20 policy meeting.

They had seen about a 14% chance of a rate hike next month before the Labor Department report showed the July consumer price index (CPI) rose 3.2% from a year ago, following a 3% year-over-year increase in June.

Traders are pricing in about a 28% chance of a rate hike by November, down from more than 30% before the release of the CPI report, with higher rates by December seen as even less likely. The Fed’s first rate cut is priced into the futures contracts by March of 2024.

The Fed has driven its policy rate up by 5.25 percentage points since March 2022 to bring inflation back down to its 2% goal. Analysts said July’s slight acceleration in year-over-year consumer price inflation – its first in 13 months – was a mathematical artifact of the CPI’s 40-year-high peak of 9% last year, and not an indication of worsening underlying trends.

“Assuming that the August print is somewhere in this vicinity … I think this largely terminates the rate-hike cycle,” said Guy Lebas, chief fixed income strategist at Janney Montgomery Scott. “There’s always a chance we get reacceleration of inflation prints after October, but I don’t think that’s going to spur Fed action.”

(Reporting by Ann Saphir, Karen Brettell and Lucia Mutikani; Editing by Bernadette Baum and Paul Simao)