Wall Street saw a strong rally this week, driven by new economic data showing inflation is staying steady and the job market is starting to slow down. This combination is fueling expectations that the Federal Reserve will cut interest rates soon—possibly as early as next week.

The latest Consumer Price Index (CPI) shows inflation is still above the Fed’s 2% target but not rising fast enough to cause alarm. At the same time, jobless claims—a measure of how many people are filing for unemployment—jumped to their highest level since late 2021. This signals that the labor market is weakening, which could push the Fed to act quickly with rate cuts.

Markets reacted positively. The S&P 500 hit a new record, the Dow Jones crossed 46,000 points, and even small-cap stocks surged. Treasury bond yields dropped, with the 10-year briefly falling below 4%. Gold prices also climbed, even surpassing their inflation-adjusted peak from 1980.

Experts believe this shift gives the Fed room to support the job market without worrying too much about inflation right now. Many economists now expect a 25 basis point rate cut at next week’s meeting, with two more cuts likely before the end of the year.

Labor market data is now taking center stage. Analysts are saying that jobless claims, not inflation, are guiding the Fed’s next move. Some think the Fed may even discuss a larger 50 basis point cut, but most expect a more modest 25 point reduction.

The inflation report showed core CPI (which excludes food and energy) rose 0.3% from July. Overall CPI increased by 0.4%, the highest since early this year. Meanwhile, jobless claims rose by 27,000 to 263,000 for the week ending September 6.

While inflation remains a concern, especially with core prices still climbing month-over-month, the Fed is increasingly focused on preventing further job losses. Policymakers seem more worried about hurting the labor market than about persistent inflation.

Some experts warn that if inflation stays elevated while job losses grow, the U.S. could face “stagflation” – a mix of stagnant growth and high inflation. However, most analysts agree that this risk isn’t serious yet.

There’s also debate about whether more aggressive rate cuts are needed. Some believe a slow and steady approach is best. Others think the Fed should act more decisively to stop a broader economic slowdown.

Market strategists say that even though inflation hasn’t been fully controlled, it’s no longer spiking. The focus is now clearly on jobs and economic momentum. If Powell and other Fed leaders signal a series of cuts during next week’s meeting, markets will likely respond positively.

Bond markets will be watching closely to see if next week’s rate cut decision is unanimous or if some Fed officials still prefer holding rates steady. Back in July, two members actually wanted to cut rates early.

Some financial analysts now predict that the Fed will cut rates three times before year-end—in September, October, and December—to bring them closer to what’s considered “neutral” for economic growth.

In financial markets, investor sentiment was upbeat:

– The S&P 500 rose by 0.8%
– The Dow Jones jumped 1.3%
– The Nasdaq 100 gained 0.6%
– Small-cap Russell 2000 index increased 1.5%

In currencies:

– The US Dollar Index dropped 0.3%
– The Euro and British Pound both rose by 0.4%
– The Japanese Yen strengthened slightly

Cryptocurrency also saw gains:

– Bitcoin rose 0.8%
– Ethereum climbed 2.4%

Bond yields mostly fell:

– The US 10-year Treasury yield dropped to 4.01%
– The US 2-year yield fell to 3.51%
– Long-term bonds like the 30-year also saw lower yields

In commodities:

– Oil prices dropped nearly 2% to $62.46 per barrel
– Gold dipped slightly by 0.2% to $3,633 per ounce

In corporate news:

– Nvidia agreed to a commission deal with the U.S. for its chip sales in China.
– Micron stock rose on strong AI-related demand in data centers.
– Delta Air Lines will offer more premium seats due to weak demand in economy class.
– Kroger increased its sales forecast due to steady food spending.
– Adobe continues to lag behind other tech companies in AI.
– UPS shares are down over 30% this year amid global trade disruptions.
– Google, Meta, and OpenAI were ordered by regulators to disclose how their AI affects kids.
– Freddie Mac and Fannie Mae received buy ratings amid hopes they’ll exit government control.
– Citigroup’s CEO noted mergers are picking up again as economic fears ease.
– Bank of New York Mellon is partnering with Carnegie Mellon for AI research.
– Centene gave a positive update on its Medicare and Medicaid businesses.
– Blockchain-based lender Figure raised $787 million in its IPO.
– Opendoor shares soared after leadership changes.
– Infosys announced a $2 billion stock buyback amid declining prices.
– Iberdrola boosted its stake in Brazilian energy firm Neoenergia.
– Novo Nordisk is calling workers back to the office as it competes in the obesity drug race.
– Discovery reported record profit growth from its health insurance arm.

Market sentiment is strong, but investors are keeping an eye on next week’s Fed meeting for clarity on what’s ahead for interest rates and the broader economy.

With all eyes on Jerome Powell’s press conference and updated Fed projections, investors hope for guidance on whether rate cuts will continue—and how quickly they might come.