Investors are trimming their bets on a May rate cut due to strong inflation numbers in the US

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Investors reduced their bets that the Federal Reserve will start cutting interest rates in May after data showed US inflation fell less than expected in January to 3.1 percent.

Following Tuesday's report, the probability of a rate cut in May through futures markets fell from 50 percent to less than 30 percent, while the chances of a cut in March have almost completely diminished.

The two-year Treasury yield, which moves with interest rate expectations, rose 0.18 percentage point to 4.65 percent, its biggest single-day move since March. The benchmark 10-year yield rose 0.13 percentage points to 4.31 percent. Yields rise as prices fall.

The S&P 500 stock index was on track to post its worst day since February 2023, down 2 percent in late afternoon trading. The tech-laden Nasdaq Composite was headed for its worst day since October, also falling 1.9 percent.

These numbers come as the Federal Reserve considers when to start cutting interest rates from their current level of 5.25 percent to 5.5 percent after a long campaign to tame persistent price pressures.

“This is uncomfortable data for the Fed [any] “We plan to cut interest rates relatively soon,” said Dean McKee, chief economist at Point72 Asset Management. “I think this removes the March rate cut, and makes a May rate cut unlikely.”

Economists polled by Bloomberg had expected annual consumer price inflation to reach 2.9 percent, down from 3.4 percent in December.

Core inflation, a closely watched measure that excludes volatile food and energy prices, was 3.9 percent year-on-year in January, in line with the previous month.

The overall significant decline in inflation over the past year has prompted central bankers in the US, Europe and the UK to rule out further interest rate increases and start discussing the possibility of cuts.

Fed Chairman Jay Powell said last month that the Federal Open Market Committee expects to cut interest rates three times this year, but noted that it is unlikely to begin doing so until more progress is made toward the 2 percent inflation target.

“The Fed will likely need more data to feel comfortable [before cutting rates]said Christina Huber, chief global market strategist at Invesco. “Progress is still happening, but perhaps not as quickly as the Fed would like.”

US President Joe Biden said on Tuesday: “While growth and employment remain strong, inflation has fallen by two-thirds from its peak, but we know there is still work to be done to reduce costs.”

The dollar, whose movements were affected by changes in interest rate expectations, rose by 0.6 percent after the release of inflation data.

Housing, vehicle insurance and medical care all contributed to price pressures in January. Shelter, of which rental costs are the largest component, had the largest impact on core inflation, with the index rising 0.6 percent in January.

Tuesday's figures showed that although the ongoing deflationary trend in basic goods continued, inflation in services remained strong, partly due to the increase in medical care costs.

The Fed's preferred measure of inflation is the core personal consumption expenditures index, which has slowed more sharply than the consumer price index. The core personal consumption expenditures index rose 2.9 percent in January year-on-year, the first reading below 3 percent in about three years.

The Fed's next policy meeting is scheduled for March 19-20, when it will release its latest survey showing officials' expectations for interest rates, inflation and unemployment.