B737-800 First Officer reported compressor stall sounds from the #2 engine and the smell of burning rubber and smoke in the cabin when they were about to level off at cruise altitude. Crew ran compressor stall and smoke/fumes checklist prior to returning to departure airport for landing.

Narrative

I was the pilot monitoring. Just prior to our level off at our cruising altitude of FL320 I noticed an abnormal noise in the #2 engine. In a matter of seconds the noise became multiple very loud bangs characteristic of a compressor stall; while also smelling something like burning rubber. The Captain immediately reduced power and lowered the aircraft's nose. While he did this; I advised center that we were leveling off at FL310 as I wasn't entirely sure if we were a [priority handling] aircraft at this point. The Captain called for the QRC for an engine compressor stall; and while I was looking for the checklist we were receiving a call from our flight attendants. At this point the engine appeared stable at a reduced thrust setting; so I answered the FA (Flight Attendant) call while the Captain advised air traffic control and got us a lower altitude. The flight attendant advised that they had smoke in the cabin; to which I responded we were working on the situation and would get back to them with more information. I informed the captain of the flight attendant's report and we decided to run the smoke and fumes QRH while diverting back to ZZZ. As there was no visible smoke in the flight deck; we both concurred that oxygen masks were not necessary. The Captain continued flying and working the radios while I ran the QRH. Once that was complete; the passengers; dispatch; and flight attendants were all advised we would be returning to ZZZ. Once we landed ARFF (Airport Rescue and Firefighting) visually inspected our aircraft for damage and reported that there was none. The captain requested that one or two of the safety vehicles follow us back to the gate; where we parked with no further incident. The casual factor was a maintenance issue with the #2 engine.