Weak labor market data masked the impact of inflation stickiness on the market, keeping stable expectations that the Federal Reserve will cut interest rates at its policy meeting on September 17 local time (Thursday, September 18 Beijing time).

The Fed faces a dilemma: a difficult trade-off between employment and inflation

Government data released last Thursday showed that consumer prices rose 0.4% in August from the previous month, a significant increase from 0.2% in July. Meanwhile, weekly initial jobless claims climbed to 263,000, a nearly four-year high and higher than the revised previous reading of 236,000.

The Federal Reserve constantly balances its dual mandate of maximum employment and price stability when setting interest rate policy . The current divergence between a significant slowdown in the job market and persistently high inflation complicates its decision-making environment. Several Wall Street strategists say the Fed faces a daunting policy challenge.

A rate cut is imminent, but for the wrong reasons?

“This is the most difficult situation the Fed could face,” said Claudia Sam, chief economist at New Century Advisors and a former Fed economist. “They are about to cut interest rates not because inflation is improving, but because of bad news on the job market.”

Sam predicts the Federal Reserve will cut interest rates by 25 basis points this week, but also emphasizes that inflation "remains too stubborn." This view is echoed by several analysts. Colin Martin, fixed income strategist at Charles Schwab, said: " Inflation remains high, persistent, and currently moving in the wrong direction ."

Joe Brusuelas, chief economist at RSM, believes that sticky inflation may cause the Fed to remain cautious after September. He pointed out: "While the market generally expects a rate cut, the underlying tone of the current data does not support the optimistic expectation of three rate cuts before the end of the year ."

As of last Friday, the CME FedWatch tool showed that the market expected a 76% probability of three rate cuts this year, mainly due to continued signs of weakness in the labor market.

AI-driven and index hit new highs, the stock market remains optimistic

Despite economic and employment concerns, Wall Street remains optimistic about the stock market outlook, believing that artificial intelligence (AI) will continue to drive the bull market into 2026. Oracle's (ORCL) strong AI backlog has impressed the market, highlighting the growth momentum of the technology sector.

Ulrike Hoffmann-Burchard, head of equities at UBS Global Wealth Management, said: "Backed by strong earnings from technology companies and expectations of a Fed rate cut, we believe that high valuations should not hinder diversification into the sector." She also expressed her expectations for further gains in U.S. stocks, with the S&P 500 target set at 6,600 points by the end of this year and 6,800 points in June 2026.

In terms of stock market performance, the Nasdaq index broke through 22,100 points for the first time this week, setting a new high for the fifth consecutive trading day; the S&P 500 and Dow Jones Industrial Average also rose simultaneously, with the latter, as a representative of blue-chip stocks, breaking through 46,000 points for the first time in history.