The weaker-than-expected May consumer price index marked a second successive month of slowing -- to a more than three-year low -- and boosted optimism that the central bank would be able to soften monetary policy after a long-running campaign of tightening.
The figures also calmed investors spooked by Friday's blockbuster non-farm payrolls data that indicated the labour market remained tight and the economy in rude health, making it harder to lower borrowing costs.
However, the Fed later in the day released its keenly awaited "dot plot" outlook for interest rates, which showed that decision-makers saw just one cut this year -- down from three predicted in its previous guidance in March.
They pencilled in a median of four cuts next year and four in 2026.
Bank boss Jerome Powell welcomed the inflation data but added that officials needed to see more "good inflation readings" before they would be confident enough to consider reducing.
The "dot plot" saw the S&P 500 and Nasdaq come off their intra-day highs, although they still managed to chalk up a third successive record close, with analysts saying the positive run of inflation data could allow the bank to cut more.
"Patience is a virtue, and it is still one that the Fed seems to hold as it outlined confidence in an economy and inflation that are on the right path," said JP Morgan Asset Management's Kerry Craig.
"The Fed could still move two times this year if inflation figures continue to soften, and... Powell did not come across as hawkish in the press conference. The markets should take away the impression of a central bank that is still on a policy easing path, even if it is coming later."
And Lon Erickson, at Thornburg Investment Management, added: "Powell specifically commented that the labour market can weaken very quickly and the Fed is not waiting for that.
"I suspect this means the Fed is at or near the point in progress on inflation that it would be willing to move quickly and decisively with rate cuts to arrest significant job losses.
"High inflation is painful for American families as he stated, but no income is much, much worse."
Asian markets largely welcomed the news out of Washington, with Hong Kong, Sydney, Seoul, Mumbai, Singapore, Wellington, Taipei and Jakarta all higher, although Tokyo, Shanghai and Manila dipped.
London, Paris and Frankfurt were all lower in the morning session.
The slowdown in US inflation and the prospect of Fed rates coming down weighed on the dollar Wednesday, although it edged back against most peers Thursday.
Observers said the euro was also supported by French President Emmanuel Macron's commitment not to resign if his party lost snap elections he called at the weekend after a shock defeat by the far right in EU-wide polls.
Macron said he wanted to form an alliance against political extremes in the vote, adding that he aimed to keep the far right from succeeding him when he steps down in 2027.
Investors are also keeping an eye on the yen as the Bank of Japan started a two-day policy meeting, with speculation swirling that it is preparing the ground for a further tightening after lifting interest rates in March for the first time in 17 years.
- Key figures around 0810 GMT -
Tokyo - Nikkei 225: DOWN 0.4 percent at 38,720.47 (close)
Hong Kong - Hang Seng Index: UP 1.0 percent at 18,112.63 (close)
Shanghai - Composite: DOWN 0.3 percent at 3,028.92 (close)
London - FTSE 100: DOWN 0.1 percent at 8,210.17
Euro/dollar: DOWN at $1.0808 from $1.0811 on Wednesday
Euro/pound: UP at 84.56 pence from 84.45 pence
Pound/dollar: DOWN at $1.2788 from $1.2797
Dollar/yen: UP at 157.26 yen from 156.86 yen
West Texas Intermediate: DOWN 0.2 percent at $78.34 per barrel
Brent North Sea Crude: DOWN 0.2 percent at $82.42 per barrel
New York - Dow Jones: DOWN 0.1 percent at 38,712.21 (close)
dan/pbt
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