Fed rate-cut expectations climb following weak jobs market report

NEW YORK – Disappointing employment data released on Sept 5 validated fears that the US labour market may be on the brink of a downturn and lifted expectations for how much the Federal Reserve will lower interest rates in 2025.

Investors are now fully pricing in a quarter-point rate cut at the Fed’s Sept 16-17 policy gathering. They also pushed closer to anticipating a total of three rate cuts in 2025, according to futures contracts. Some Fed watchers said the weak jobs data could spur officials to consider a larger-than-typical half-point in September, though inflation data due this week could temper those expectations.

“There’s no question they’re going to cut a quarter point,” said Ms Diane Swonk, chief economist for KPMG. “This underscores that the cracks in the labour market are getting wider, and that is problematic.”

The reaction came after the Bureau of Labour Statistics said employers added 22,000 jobs in August and the unemployment rate rose to 4.3 per cent. The figures – including revisions that showed payrolls were negative in June for the first time since December 2020 – locked down expectations that officials will need to intervene in September to support the labour market, even as inflation remains above the Fed’s 2 per cent target and may head higher because of tariffs.

Economists at Barclays said after the report that they now see three rate cuts in 2025 – one at each of the Fed’s remaining meetings – compared with the two reductions they previously expected. 

After September, Fed officials will meet twice more in 2025 – on Oct 28-29 and Dec 9-10.

Even prior to the latest jobs report, a substantial slowdown in payroll growth over the summer had prompted comments from Fed chair Jerome Powell and other policymakers that the balance of risks was shifting away from inflation and towards unemployment.

Mr Powell hinted at a coming rate cut in an Aug 22 speech in Jackson Hole, Wyoming. And on Sept 4, New York Fed president John Williams

said it would be appropriate to cut rates “over time”

, also nodding to the shifting balance of risks.

Mr George Catrambone, head of fixed income at DWS Americas, said: “The weakness in payroll data can no longer be ignored or chalked up as a one-off.”

But policymakers ready to lower rates may be in for a heated discussion at their next gathering. Some officials, including Cleveland Fed president Beth Hammack and Kansas City’s Mr Jeff Schmid, have expressed concerns about the risk that tariffs and other policies could reignite persistent price pressures.

Chicago Fed president Austan Goolsbee on Sept 5 said he is still undecided on what action he will support at September’s meeting, adding that he would like to see the inflation data coming this week before he decides. 

“The more mild numbers we get on inflation, the better I’ll feel about just focusing on the labour market,” Mr Goolsbee said during an interview with Bloomberg. “But in the last inflation reports, we also had this uptick in inflation coming from services, so I think we want to make sure that that’s more of a blip and not a more ominous indicator.”

The divergence of the Fed’s two mandates – with the labour market weakening while inflation remains above its 2 per cent target – is a dreaded situation for central bankers, but also one that they forecast a few months ago.

In June, which was the last time Fed officials released economic projections, they forecast climbing unemployment and inflation around 3 per cent. At the time, they signalled that would warrant two rate cuts in 2025, based on a median projection of 19 policymakers.

What has played out since then – nearly exactly what they forecast save for somewhat stronger growth – argues for keeping to that same projected path for policy, said Mr Brett Ryan, senior US economist at Deutsche Bank. 

“That is the anchor here,” Mr Ryan said of the June projections. “You could be revising growth and inflation up but your unemployment rate is the same, so why are you adding to cuts in that world?”

But the Fed has also changed since June. At the July meeting, when officials left rates unchanged, two governors

dissented in favour of a cut

. A new vacancy on the board and a fast-tracked confirmation process for a Trump-appointed replacement means there will be even more support for a faster pace of rate cuts. The US President has repeatedly urged the Fed to lower rates quickly and aggressively.

Mr Donald Trump’s

pick to fill the vacancy on the Fed’s Board of Governors, Mr Stephen Miran

, is expected by some to push for a half-point cut if he is confirmed by the Senate in time for the Sept 16-17 gathering.

Still, the weak employment report may not be enough to sway the rest of the committee, according to many Fed watchers. 

Mr Michael Gapen, chief US economist for Morgan Stanley, said: “I don’t think this warrants a 50-basis-point cut in September. But you could argue that maybe the Fed needs to move sequentially and cut by 25 per meeting rather than, say, 25 per quarter.” BLOOMBERG