Fed Rate Cut Looks Certain After Weak August Jobs Report
Key Insights
- The US financial Markets now expect a Fed rate cut of at least 25 basis points in September.
- The weak August jobs report showed just 22,000 new positions, and unemployment is rising.
- Investors see rate cuts continuing into December as the Fed shifts focus from inflation to jobs.
According to recent reports, a Fed rate cut now appears inevitable. This comes after the latest jobs report from the US showed that hiring had hit a wall.
The Federal Reserve is expected to meet in mid-September. Also, analysts already expect a cut by at least 25 basis points.
The August employment report showed only 22,000 new jobs, which is low compared to predictions of 75,000. Alongside this, unemployment rose to 4.3% ( the highest level since 2021).
Fed Rate Cut Appears Almost Certain
Over most of this year, the Federal Reserve has kept its benchmark interest rate in a 4.25 to 4.50% range. Officials have pointed out that inflation control is expected to increase consumer prices.
This could be seen especially considering the new tariffs from President Donald Trump’s administration,
However, the weak job numbers have changed the balance of risks. Many economists now believe the Fed will prioritise employment over inflation.
Bank of America predicts rate cuts in September and December. Also, the policy rate is expected to drop towards 3.00 to 3.25% by the end of next year.
Market Reaction to Fed Rate Cut Expectations
The CME FedWatch tool shows a 90.4% probability of a 25 basis point cut this month. There is also a 9.6% chance of a larger 50 basis point cut. While a bigger move is currently unlikely, investors are preparing for the possibility of multiple cuts into next year.
Markets have already responded to this development. Treasury yields fell after the jobs report showed that confidence in rate cuts is rising. Stocks rose, and the S&P 500 reached new record highs as investors priced in cheaper borrowing costs.
Dual Mandate Puts Pressure on Fed
The Fed operates under a dual mandate. It keeps inflation low while supporting maximum employment at the same time. For much of the year, officials leaned toward controlling inflation.
Annual price growth has stayed above the Fed’s 2% target, and tariffs have added further pressure on costs. As of writing, the labour market is showing signs of weakness. The slowdown in job creation and higher unemployment have increased the risk of damage over the long term.
Over a quarter of unemployed workers have been out of work since early February. Joblessness among Black Americans climbed to 7.5%, which indicates that vulnerable groups are being hit harder.
Fed Rate Cut May Come in Stages
Most analysts see the Fed starting with a modest 25 basis point cut in September. This would bring the target range down to 4.00 to 4.25%. Another similar cut could come in December if the labour market weakness continues.
Some market voices, including Treasury Secretary Scott Bessent, have called for a bigger move of 50 basis points. These voices argue that more decisive action would bring more confidence to the market and prevent any more declines in hiring.
However, others warn that cutting too aggressively could make the market volatile, especially if inflation continues to be sticky.
More Presidential Pressure on the Fed
President Trump has long pushed for lower rates to boost growth. White House economic adviser Kevin Hassett said Friday’s data could justify larger monthly cuts. Trump has also shown interest in replacing Fed Chair Jerome Powell when his term ends in May.
This political backdrop is another source of pressure on policymakers. However, Powell has leaned towards caution.
He noted recently at the Jackson Hole symposium that the Fed would move carefully unless the labour market shows clear deterioration. The August jobs report may be enough to tip that balance.
