Why weak US jobs growth is pushing the Fed toward faster rate cuts

Why weak US jobs growth is pushing the Fed toward faster rate cuts

The US Federal Reserve is poised to resume cutting interest rates this month after a dismal August jobs report deepened concerns about the labour market. The economy added fewer than 600,000 jobs so far this year — the weakest showing for the first eight months since 2009, excluding the pandemic year. The slowdown has shifted Wall Street’s expectations toward consecutive rate cuts at each of the Fed’s three remaining policy meetings in 2025, the Wall Street Journal reported.

Markets bet on steady cuts

Friday’s employment report left little doubt that the Fed will cut rates at its September meeting. The bigger question is whether policymakers will cut at every meeting through December. Traders now assign a 75 percent probability of three consecutive quarter-point reductions, according to CME Group. Yields on the two-year Treasury note, closely tied to Fed policy, dropped to their lowest level in three years as markets priced in more aggressive easing.

Powell’s balancing act

Fed Chair Jerome Powell has already signalled greater concern about employment than inflation. In a speech last month, he argued that labour market weakness may be understated by headline figures and cautioned against ignoring softening demand. Powell suggested that easing policy could act as a natural brake against tariff-driven price increases by restraining hiring and wage growth. His remarks were seen as laying the groundwork for cuts even before the August numbers confirmed a slowdown.

Why a bigger cut is unlikely

Some analysts see a case for a half-point reduction in September, mirroring a similar move last year. But most Fed officials are wary. Two key differences set this year apart. First, interest rates are already a full percentage point lower than a year ago, closer to the neutral level that neither stimulates nor restrains growth. Second, inflation progress has stalled, with consumer prices potentially rising above 3 percent. With inflation still well above the Fed’s 2 percent target, policymakers are expected to move cautiously.

The jobs and inflation puzzle

The August report showed significant declines in manufacturing and construction employment, with hiring softness persisting since May — shortly after President Trump announced sweeping tariffs. Businesses of all sizes have warned they may delay investment until trade policy stabilizes. Other Trump-era experiments, including tighter immigration rules and cuts to federal contracts, could also be weighing on labour demand. The Fed must now assess whether these are temporary drags or signs of deeper weakness.

Data that could shift the debate

Two major data points loom before the Fed meets on September 16–17. The Labor Department will release revisions to employment levels through March 2025, which Powell has warned could “materially” lower reported payrolls. Days later, the August consumer-price index will be published. A softer inflation reading could give officials more confidence to cut rates aggressively, while a firmer one could reinforce caution.

The Fed faces a delicate balancing act. Weak hiring strengthens the case for faster rate cuts, but inflation risks argue against moving too quickly. Powell appears inclined to prioritize jobs, but divisions remain within the central bank. For markets, the question is no longer if rates will fall — but how far and how fast the Fed is willing to go.