Fed Rate-Cut Expectations Climb Following Weak Jobs Market Report

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

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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 cut 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 labor market are getting wider, and that is problematic."

The reaction came after the Bureau of Labor Statistics said employers added 22,000 jobs in August and the unemployment rate rose to 4.3 percent. 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 labor market, even as inflation remains above the Fed's 2 percent 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.