Traders bet Fed will hold rates steady, start cuts in May

(Reuters) – Traders on Thursday maintained bets the Federal Reserve will hold interest rates steady for three more meetings before starting to cut interest rates, after a government report showed inflation edging lower. 

Futures contracts that settle to the Fed’s policy rate reflected a better-than-even probability that the U.S. central bank will deliver its first reduction to the benchmark target at the May meeting, to a 5%-to-5.25% range from 5.25% to 5.50% currently. 

The personal consumption expenditures price index (PCE) increased 3.0% last month from a year earlier, the Commerce Department’s Bureau of Economic Analysis reported. That was the smallest year-on-year gain since March 2021 and followed a 3.4% advance in September.

The Fed targets 2% inflation.

“The Fed is on hold, and (this report) gives them more comfort in staying on hold. What they’re doing is working,” said Robert Pavlik, senior portfolio manager at Dakota Wealth. “The data is trending in the direction that the Fed wants to see.”

Rate futures contracts are pricing in a Fed policy rate of 4.18% by the end of 2024.

(Reporting by Ann Saphir, Lucia Mutikani and Stephen Culp; editing by Jonathan Oatis)