(Reuters) - The Federal Reserve is likely to resume cutting interest rates in June and could reduce short-term borrowing costs again in September, traders bet on Tuesday as they took on board the implications of a widely watched survey that showed consumer confidence dove this month, and inflation expectations surged.

U.S. consumer confidence deteriorated at its sharpest pace in 3-1/2 years in February, the Conference Board survey showed, reflecting growing American anxiety over the economic impact of President Donald Trump's policies. At the same time consumers' average inflation expectations rose to 6%, the highest since May 2023.

Interest-rate futures contracts are now pricing in a more than 70% chance that the Fed will reduce its policy rate by a quarter of a percentage point at its June meeting, to a range of 4.00%-4.25%, and cut it again as soon as September. The betting suggests traders feel that by June the central bank's concerns about potential labor market weakness will outweigh worries of resurgent inflation, prompting it to respond with monetary policy easing. 

Fed policymakers themselves have said they are looking for more evidence that inflation is heading back down to their 2% goal before they feel comfortable cutting rates. They cite uncertainty over how Trump's planned tariffs, tax cuts, immigration crackdown, and ongoing reductions in the federal workforce will affect prices, economic growth, and the labor market.

A report on Friday is expected to show some small progress on the inflation front, with the year-over-year personal consumption price index that the Fed targets expected to have edged down to 2.5% in January from 2.6% in December. Meanwhile the labor market has remained strong, with unemployment at 4% in February, though recent surveys suggest business activity is slowing.