As a Result of a Weak Job Market Report, Fed Rate Cut Expectations Are Climbing

Disappointing labor market data released Friday confirmed mounting concerns that the U.S. job market is weakening, fueling expectations for deeper Federal Reserve rate cuts this year.

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Markets are now fully pricing in a quarter-point reduction at the Fed’s September 16–17 policy meeting. Futures contracts also suggest investors are leaning toward three total cuts in 2025. Some analysts even floated the possibility of a larger half-point cut this month, though upcoming inflation figures could reshape those expectations.

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“There’s no doubt the Fed will cut rates by at least a quarter point,” said Diane Swonk, chief economist at KPMG. “The cracks in the labor market are widening, and that’s a serious concern.”

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The cautious mood followed the Bureau of Labor Statistics’ report showing just 22,000 jobs were added in August, while the unemployment rate climbed to 4.3%. Revisions also revealed payroll losses in June the first negative month since late 2020. Together, the numbers solidified expectations that policymakers must act to stabilize the labor market, even with inflation still running above the Fed’s 2% goal and potentially climbing higher due to tariffs.

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Looking ahead, the Fed will meet two more times in 2025 after September: October 28–29 and December 9–10.

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Signs of a cooling labor market had already been evident earlier this summer. Fed Chair Jerome Powell and other officials acknowledged the shift, noting risks were moving away from inflation and toward unemployment. Powell hinted at easing in his August 22 Jackson Hole speech, while New York Fed President John Williams suggested last week that gradual cuts were appropriate.

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“The weakness in payrolls is no longer something the Fed can dismiss as a fluke,” said George Catrambone, head of fixed income at DWS Americas.

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Still, the upcoming September meeting could spark intense debate. Some policymakers, including Cleveland Fed President Beth Hammack and Kansas City Fed President Jeff Schmid, have raised concerns that cutting too aggressively risks reigniting inflation especially with tariffs in play.

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The Fed’s challenge is clear: unemployment is rising just as inflation remains above target. Central bankers have long feared this scenario, but they had already flagged the possibility months ago.

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Back in June, policymakers projected both higher unemployment and inflation around 3%. The median forecast of 19 officials suggested two rate cuts this year. Since then, the economy has largely unfolded along those lines, aside from slightly stronger growth. That, according to Brett Ryan, senior U.S. economist at Deutsche Bank, argues for staying the course.

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“The June projections remain the anchor,” Ryan explained. “Even if growth and inflation are revised higher, if unemployment holds steady, it doesn’t justify adding more cuts.”

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But conditions at the Fed itself have shifted since June. At the July meeting, when rates were left unchanged, two governors dissented in favor of an immediate cut. Meanwhile, a vacancy on the Fed’s board and President Trump’s fast-tracked nominee could tip the balance further toward easing. Trump has been vocal in urging the central bank to slash rates swiftly.

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Stephen Miran, Trump’s pick for the Board of Governors, is expected by some analysts to advocate for a half-point cut if confirmed before the September meeting.

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Even so, many Fed watchers doubt the latest jobs report alone will be enough to secure such an aggressive move.

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“I don’t think the case is strong enough for a 50-basis-point cut in September,” said Michael Gapen, chief U.S. economist at Morgan Stanley. “But the Fed could decide to move more consistently 25 basis points at each meeting rather than spacing cuts quarterly.”

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The coming weeks will bring clarity as inflation data and political pressures collide with economic realities. For now, investors are bracing for the Fed to act decisively to prevent the labor market’s slowdown from turning into something more severe.

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