There's a reason markets don't believe the Fed will raise interest rates again this year

Federal Reserve officials have raised interest rates for the second time this year and have indicated their intention to hike borrowing costs at least once more before the end of the year.

But investors don't believe them. Markets are pricing in a negligible 17.3% chance of a rate increase in September, the Fed's next meeting that includes a press conference, and just a 31.6% chance for December, according to Bloomberg's World Interest Rate Probability index.

Fed Chair Janet Yellen said during her post-meeting press conference that the central bank's credibility "has not been impaired" after consistently undershooting its inflation target. But the market's reaction to the Fed statement suggests that's not entirely true.

"The inflation data has to be concerning, especially as long-term inflation expectations have now completely retraced their post-election increase," wrote credit strategists at Bank of America-Merrill Lynch in a research note sent out to clients on Tuesday.

They offer some fairly compelling historical evidence on changes in core consumer prices, which exclude food and energy.

"Since 1957, there have been 722 overlapping two-month periods. As core CPI prices almost always go up, in only six of these, or less than 1%, have we seen core CPI deflation - but that includes the most recent March-April period this year," they wrote.