According to CoinDesk, Thursday's Consumer Price Index (CPI) report indicated further signs of cooling prices, although inflation remains above the Federal Reserve's 2% target. The Fed's focus may shift more towards the labor market, which could pose a threat if it continues to slow significantly. The likelihood of a rate cut in September has increased to nearly 95%.

Markets, including cryptocurrencies, experienced a brief rise following the CPI report, which showed that prices cooled more than expected in June. This spurred hope among traders that the Federal Reserve might cut interest rates this year. Despite Friday’s Producer Price Index (PPI) data coming in hotter than expected, traders remained confident that the central bank will cut rates in September, with odds just under 95%, according to CME’s Fed Watch tool.

The Fed has a dual mandate to maintain price stability and promote maximum employment. A weakening labor market might force the Fed to ease monetary policy before inflation returns to its 2% target. June's CPI data showed inflation rising at a 3% year-over-year pace. The U.S. unemployment rate has increased for three consecutive months, reaching 4.1% in June from 3.8% in March.

John Leer, head of economic intelligence at Morning Consult, stated, “I do believe the labor market is going to be the bigger risk to the economy going forward. While it shows signs of cooling, it remains very strong by historical standards. It would be a historical anomaly if the Fed manages to successfully engineer a soft landing, i.e., tame inflation without triggering a recession.”

Fed Chair Jerome Powell acknowledged the slowdown in the labor market during an appearance on Capitol Hill earlier this week, noting that it is no longer “a source of broad inflationary pressures for the economy.” Olu Sonola, Fitch Ratings' head of U.S. economic research, added, “The Fed will be worried that the negative trend may be a turning point for additional weakness in the labor market down the road. Chair Powell did signal earlier this week that the balance of risk between the unemployment rate and inflation is now two-sided and the labor market is now back in balance. This gives them an incentive to start cutting rates sooner than later, now that inflation seems to be back on that path down to 2%.”

Markus Thielen of 10x Research cautioned that even if the Fed starts to cut rates, it might not be as bullish of a signal as some traders think. Investors in a weakening economy might choose to pull money out of risk assets, including cryptocurrencies, to allocate it to safer investments.