Wall Street has shifted into rally mode amid indications that the US economy is cooling along with inflation pressures, providing the Federal Reserve with the "soft landing" it has been seeking.
But after a strong week for equities, investors will be looking to the Fed on Wednesday to confirm this scenario and to leave interest rates unchanged. The central bank paused last month after 17 straight quarter-point rate hikes.
In the week to Friday, the blue-chip Dow Jones Industrial Average rose 1.48 percent to 11,560.77, and is now less than 200 points from its all-time hit in January 2000 of 11,722.98.
The broad-market Standard and Poor's 500 advanced 1.61 percent on the week to 1,319.87.
The tech-dominated NASDAQ composite meanwhile soared 3.2 percent to 2,235.59.
Slowing economy
Economic reports over the past week appeared to confirm the notion of an economy that is slowing, easing inflation pressures. Also helping the market has been the sharp drop in oil prices, down nearly 20 percent from peaks hit in July and last month.
Dick Green at Briefing.com said the most recent inflation data "indicate that the soft landing in the economy is proceeding almost exactly as the Fed would draw it up."
"It may very well be that the macro-fundamentals are settling into a sweet spot for the stock market. Inflation is restrained, interest rates are likely to remain at current levels, the economy is growing at a moderate pace, and earnings growth is continuing," Green said.
Douglas Porter, economist at BMO Nesbitt Burns, said that even though inflation has been running hotter than the Fed would like, the trend is downward. He said the Fed may hint at further rate hikes but probably will not act on rates.
Much attention will be focused on the Fed meeting on Wednesday, with most analysts expecting policymakers to hold the federal funds target at 5.25 percent.
This comes in part from data showing a soft 0.2 percent gain in US retail sales -- an indication of consumer spending that makes up two-thirds of economic activity -- and a tame 0.2 percent rise in consumer prices last month.
"Underlying trends remain just firm enough to keep the Fed's tightening bias intact, but moderate enough to keep the Fed from acting on that bias again anytime soon," Porter said.
"The main reason why the Fed is content to bide its time, even as core inflation trends grind higher, is that officials are expectant that slower growth will undercut price pressures. And there were plenty of indications this week that growth is indeed slowing," Porter said.
Fear factor
Fred Dickson, market strategist at DA Davidson, said inflation fears have been a main factor holding back the market in recent months, and that if investors see inflation as tamed it will be a big positive.
"Inflation fears continue to subside and along with it fears of the Fed tightening rates," Dickson said.
"We suspect the stock market will continue to drift up going into next week's [Fed] meeting on September 20. The Fed has received several data points suggesting that inflation is moderating as expected. Our sense is that if the Fed decides to leave interest rates unchanged next Wednesday, the stock market will rally sharply on that news," he said.
Bond prices drifted down over the past week. The yield on the 10-year Treasury bond rose to 4.798 percent from 4.771 percent a week earlier, while that on the 30-year bond climbed to 4.919 percent against 4.916 percent.
Bond yields and prices move in opposite directions.
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