Fed seen ending rate hikes by March as inflation slows

(Reuters) - The U.S. central bank is seen delivering two more quarter-point interest-rate increases before ending its current round of rate hikes in March, after a government report showed inflation continued to slow last month.

The Fed's preferred gauge for inflation, the personal consumption expenditures (PCE) price index, rose 5.0% last month from a year earlier, slower than the 5.5% 12-month gain as of November, the Commerce Department reported.

Core PCE, which the Fed uses to gauge the underlying momentum of inflation, rose 4.4% from a year earlier, but in the most recent three-month average around 3.2% on an annualized basis.

That cooling has traders betting the Fed will soon wind down its most aggressive policy-tightening in 40 years. Futures tied to the Fed's policy rate are pricing in near certainty for the Fed to raise its benchmark rate to 4.5%-4.75% at its Jan. 31-Feb. 1 meeting, from 4.25%-4.5% now, with another quarter-point hike priced in for March.

Traders see just a one-in-three chance of a further quarter-point increase after that, and after the report firmed up their bets on rate cuts starting as soon as September.

Fed policymakers have signaled they expect rates ultimately to go a bit higher - to just over 5% -- and have said they do not expect to cut rates this year so as to make sure they definitely win the war on too-high inflation.

(Reporting by Ann Saphir; Editing by Raissa Kasolowsky, William Maclean)