The Federal Reserve is seen slowing interest rate hikes next month and ultimately raising borrowing costs less aggressively this year and next after data released Wednesday showed U.S. inflation eased more than expected last month.

Traders of futures tied to the Fed's benchmark rate slashed bets on a third straight 75-basis-point hike in September after a U.S. Labor Department report showed consumer prices didn't rise at all in July compared with June.

That relief came after months of accelerating price pressures that had Fed policymakers tightening policy faster than any time since the 1980s.

Traders now expect the Fed to downshift in September, raising rates a half-a-percentage-point to a range of 2.75%-3%, and to top out in December at 3.25%-3.5%.

Before the report, traders were betting the Fed would need to raise rates to a range of 3.5%-3.75% or higher to bring decades-high inflation under control.

Still, the Fed's battle with high inflation is far from over, and Fed policymakers may be hesitant to let up on rate hikes until they get more confirmation that inflation is easing. The consumer price index rose 8.5% in July from a year earlier. Wednesday's report showed. The Fed targets 2% inflation.

The core consumer price index - which strips out volatile gas and food prices and is seen as a better predictor of future inflation - rose 0.3% from June and 5.9% from a year earlier.

"Overall, prices remain uncomfortably high," wrote High Frequency Economics' Rubeela Farooqi, who stuck to her call for a 75-basis point rate hike next month. "Coupled with strength in job growth and wages, the data support the case for another aggressive rate hike in September."