Stocks closed higher on Friday and for the week. The small-cap Russell 2000 led the way on Friday with a 2.49% gain. But the Nasdaq led the indexes for the week with a 5.95% gain. Although, the small-caps were not far behind with a weekly gain of 4.35%, followed by the S&P with 4.02%.

Better than expected CPI and PPI inflation reports last week confirmed that progress on inflation continues and that inflation risks have receded.

Although, risks to the labor market have risen and have seemingly become the chief concern for the Fed.

But at the moment, the jobs market continues to grow, and the prospect for a soft landing remain.

That has set the stage for the first change in interest rates in a little over a year (14 months), and the first rate cut in 4½ years (54 months).

The Fed Funds rate is currently at 5.25%-5.50% (midpoint of 5.38%). While odds prior to last week were at 80/20 favoring a 25 basis point rate cut vs. 50 bps, those odds have shifted to 50/50 between 25 bps and 50 bps.

The risks to the Fed for a 25 bps cut are that they are moving too little too late to stem a potential larger slowdown in the economy. The risks of a 50 bps cut are that they are sending the wrong signal to the market, i.e., that they indeed waited too long and that they are fearful that a marked slowdown could be coming.

Make no mistake, a rate cut is welcomed. And the beginning of a rate cut cycle is needed. As Fed Chair Jerome Powell recently said, "the time has come for policy to adjust." But the debate over how big the first cut should be, and what message it will send to the market is still up for debate. But we will soon find out when the Fed wraps up their 2-day meeting on Wednesday, 9/18 when they make their FOMC Announcement.

Once that's done, the debate will shift to how low should the Fed ultimately lower rates, and how fast?

While some are predicting a full percentage point cut in total by early next year (which means a 25 basis point cut in Sep., Nov., Dec., and Jan.), some believe we could see a full percentage point cut by year's end, which means two 25 bps cuts and one 50 bps cut within the remaining three FOMC meetings this year.

Still others believe interest rates should fall all the way down to 3.5% before all is said and done, which would mean a cut of nearly two full percentage points (188 bps) in total.

In other news, Friday's Consumer Sentiment report rose 1.62% last month with the index at 69.0 vs. last month's 67.9 and the consensus for 68.0.

It'll be a busy week of economic reports this week with the Empire State Manufacturing Index kicking things off today.

But the FOMC Announcement will be the main event this week.

Stocks are back on the upswing. The Dow is only 0.41% away from their all-time closing highs from just a couple of weeks ago. The S&P 500 is just 0.73% away from their July closing highs. And the Nasdaq is further away, but only needs another 5.17% to get to their highs.

And with Q4 historically being the best quarter of the year for stocks, I expect to eclipse those highs in the coming months, if not sooner.

See you tomorrow,