Markets think the odds of a Fed rate cut in July are almost 50% after April CPI showed inflation cooling more than expected

AP Photo/Andrew Harnik

• Inflation in April increased by less than anticipated, spurring further bets the Federal Reserve will start rate cuts this summer. 
• Odds of a cut in July rose to 45.9% on Wednesday from 29.3% a day earlier. 
• Traders see the Fed pausing its aggressive rate-hike campaign in June. 

Inflation in April continued to come down from peak levels, and that's driving up anticipation that the Federal Reserve will move quickly to cut interest rates. 

Odds of a cut in July climbed to 45.9% on Wednesday from 29.3% a day earlier, according to the CME FedWatch tool. 30-day fed fund futures contracts are used to monitor what investors foresee as the potential next steps by the central bank's rate-setting committee. 

The probability was also higher than 34.6% logged a week ago. 

The increased odds followed the government's report Wednesday that the Consumer Price Index increased to 4.9% in April annually. That was the slowest reading since May 2021 and below expectations of a 5% growth rate.  Core CPI that strips out food and energy prices rose to 5.5%, meeting expectations for the rate to ease from 5.6% in March. 

"The Fed wants to pause [rate hikes] and because the inflation data is coming in as expected – and not surprising to the upside as feared – they are going to have the room they need to stop raising interest rates," Chris Zaccarelli, chief investment officer at  Independent Advisor Alliance, said in a note. 

Federal Reserve Chairman Jerome Powell and his colleagues last week ushered in their 10th consecutive rate increase as inflation remains above their 2% target. The Fed funds rate at 5%-5.25% stands at the highest since 2007. 

The Federal Open Market Committee said it "will closely monitor incoming information and assess the implications for monetary policy" – suggesting it's open to halting its most aggressive cycle of rate hikes in decades. 

Inflation appears unlikely to rev higher again, which means the most likely scenario for monetary policy is the Fed remaining on hold, said  Zaccarelli. Meanwhile, the economy "will begin to slow this year and a recession is still likely – it is more a matter of when and not if." 

Traders in the Fed funds futures market see a 91% probability that Powell & Co. will keep the key rate steady at its June 14 meeting.