Traders are betting on a shift in Federal Reserve policy, projecting a departure from rate hikes as early as May, following the release of a U.S. government report indicating stable consumer prices in October.

The report, issued by the Labor Department, revealed that consumer prices remained unchanged in October compared to the previous month. This data has led to a significant reassessment by market participants, with futures contracts indicating a mere 5% probability of the Fed raising its policy rate beyond the current 5.25% to 5.50% range.

Prior to the report, these futures contracts had suggested a 28% chance of a rate hike by January. However, the October figures, which showed a 3.2% year-on-year increase in the consumer price index, down from 3.7% in September, have altered expectations.

Energy prices, a key concern for consumers, saw a notable 2.5% decline in October compared to September. Core inflation, excluding energy and food, rose at a slower pace of 4%, marking the slowest increase in over two years. Despite remaining above the Fed’s 2% target, this downward trend may bolster confidence among Fed policymakers regarding the efficacy of current monetary policy.

Analysts, including Brian Jacobsen, Chief Economist at Annex Wealth Management, are interpreting these developments as a signal to bid farewell to the era of rate hikes. Jacobsen remarked, “You can say goodbye to the rate-hiking era.”

Market sentiment suggests that the Fed is now more likely to implement its first rate cut by May, with rate futures pricing indicating a potential one percentage point reduction by the end of 2024. The Federal Reserve last raised rates in July, but recent statements from Fed Chair Jerome Powell indicated a willingness to raise rates further if necessary to combat inflation.

Despite the optimistic data, Nationwide Chief Economist Kathy Bostjancic suggests that the Fed is likely to maintain a cautious stance. In her assessment, “The Fed for now will maintain its tightening bias, erring on the side of caution.”

As policymakers prepare to convene in December, they will consider the latest inflation report alongside an updated analysis of the job market. Recent data shows a cooling job market, with the unemployment rate ticking up to 3.9% and wages rising at the slowest pace in nearly 2-1/2 years. The upcoming meeting may provide further insights into the Fed’s stance on economic policies.