Traders price in almost 78% chance that Fed will cut rates by May

Fed funds futures traders are lifting the likelihood of at least a quarter-point rate cut from the U.S. central bank by May, driven by optimism that inflation will continue to fall.

That likelihood was seen at 77.9% as of Wednesday morning, up from 65.2% a day ago and 41.6% last month, according to the CME FedWatch Tool. Such a move would take the fed funds rate target down to either between 5%-5.25% or even lower versus a current level of 5.25%-5.5%, a 22-year high.

The readjustment in expectations comes a day after Fed Gov. Chris Waller said that the economy may be in the process of softening by enough to push inflation lower. Treasury yields extended their declines as a result, with the policy-sensitive 2-year rate falling 11.2 basis points to 4.622% Wednesday morning.