Dow Rebounds After Sharp Drop Following Inflation Data Release

US stock markets witnessed a dramatic recovery after an initial steep decline prompted by a key inflation report.

The Consumer Price Index (CPI) data, released on Wednesday, which showed a slowdown in annual price increases to 2.5%—the lowest since February 2021—raised investor concerns that the Federal Reserve would opt for a more cautious approach to cutting interest rates in its upcoming meeting.

Following the release of the CPI report, the Dow Jones Industrial Average plunged as much as 700 points, or 1.7%, reflecting growing uncertainty over the Federal Reserve’s next move. Traders had hoped for a larger half-point rate cut from the Fed, but the higher-than-expected rise in core inflation, which excludes volatile food and energy prices, shifted market sentiment. Core inflation rose 0.3% month-over-month, exceeding expectations for a 0.2% increase. This data led to reduced chances of a half-point cut, with traders now pricing in an 85% probability of a more modest quarter-point cut.

Despite the early market turbulence, investor sentiment shifted in the final hour of trading. The Dow erased its losses, ending the day up 124 points, or 0.3%. The S&P 500 rose by 1%, and the Nasdaq Composite gained 2.2%, bolstered by strong performance in the technology sector. Notably, shares of AI chipmaker Nvidia surged 8%, driven by reports that the US government may allow the company to export advanced chips to Saudi Arabia.

The seesaw trading action is not uncommon in September, a historically volatile month for stocks. Wall Street’s quick recovery reflects how quickly investor sentiment can shift, particularly in response to economic data and potential political changes, with the Federal Reserve’s policy decision looming large next week.

CNN, Reuters, and Yahoo Finance contributed to this report.