The Federal Reserve is now seen nearly certain to deliver just a quarter-point interest-rate hike at its next meeting and likely to ultimately stop raising rates short of 5%, after a government report Thursday showed inflation eased last month.
Fed funds futures rose after the U.S. Labor Department reported consumer prices fell in December, and ticked up further after Philadelphia Fed President Patrick Harker said quarter-point interest rate hikes would now be appropriate.
Prices now reflect about a 95% probability that the Fed will raise rates just a quarter of a percentage point at its next meeting on Jan. 31-Feb. 1, versus about 5% for a half-point hike.
Last year most of the Fed's rate hikes were in 75-basis-point increments as central bankers sought to tighten policy quickly to bring down 40-year-high inflation. Thursday's data showed consumer prices rose 6.5% in the 12 months through December, still far higher than the Fed's 2% target but the slowest pace in more than a year.
Traders also increased bets Thursday that the Fed will deliver only one more quarter-point rate hike before stopping at a 4.75%-5% range, and then will cut rates in the second half of the year. The current target range is 4.25%-4.5%.
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