As with cutting inlay parts, the first step is to select a cutter diameter that is large enough to give you the desired cutting speed, but small enough to produce the level of detail necessary to accurately shape the pocket. Often multiple tools, used sequentially, are required to shape a pocket that will accept the inlay part with minimum insertion force or interference. 

When cutting pockets, a new cutting strategy must be formulated. If the pocket is relatively large (20X the size of the smallest diameter bit you plan to use), it makes a lot of sense to rough out the pocket.  This step should leave a minimum amount of "stock" that will need to be removed in a clean-up pass using a smaller diameter cutter to achieved the final size and shape. For large pockets this two step process is almost invariably  shorter than a single, lower speed pass with a smaller diameter bit. 

A key point in this strategy is to rough out the pocket from the inside out. By "wallowing out" the center first, you create an ever widening debris pocket, allowing the flutes to run cleaner and cooler. This roughing pass will be "climb-milled", moving the tool in a counter-clockwise outward spiral. Inward bit deflection during climb-milling will result in a pocket that is slightly smaller than planned.

Overlap between successive roughing passes should be 20 - 50% of the tool diameter (assuming full plunge, single pass machining). More overlap (larger percentage) yields a smoother bottom, especially in softer woods, but results in a longer cutting time.  A little experimentation with the material you will be pocketing will help you decide which overlap setting is right for your application.  

Set the depth of cut to be 0.003" - 0.005" shallower than the thickness of the part you will inlay.  This will make final surface finishing go faster and result in a perfectly flush inlay. Again, this is a situation where depth setting rings can prove invaluable.

The clean-up pass, often with a smaller diameter bit, will be "conventionally-milled" (clockwise around the pocket).  The amount of stock left during rough-out needs to be calculated so that the cutting resistance of the wood is approximately balanced by the tendency of the bit to drift into part, resulting in minimal bit deflection. As with part shaping,

stock thickness = (clean-up bit diameter) / 8

If cycle time is not a concern, an entire pocket can be cut with the smallest bit diameter demanded by the artwork.

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