The August Jobs Report and the Fed’s Rate-Cutting Path: Implications for Equity and Bond Markets

The August 2025 jobs report has delivered yet another punch to the labor market, and the Federal Reserve is now staring down the barrel of a rate-cutting decision. According to a report by Bloomberg, nonfarm payrolls added just 75,000 jobs in August, a modest improvement from July’s 73,000 but still far below the 12-month average of 128,000 [1]. The unemployment rate is expected to tick up to 4.3%, a sign that the labor market’s “soft landing” narrative is fraying at the edges [2]. Meanwhile, the ADP Employment Report painted an even grimmer picture for private-sector hiring, with only 54,000 jobs added—well below forecasts—and job losses in manufacturing and trade sectors [5].

This isn’t just a numbers game; it’s a signal to the Fed that the economy is losing steam. The labor market’s cooling is being driven by a perfect storm: Trump-era tariffs cranking up input costs, immigration policy shifts shrinking the labor supply, and AI adoption disrupting traditional hiring patterns [3]. As stated by Federal Reserve Governor Christopher Waller in a recent speech, “The data from May, June, and July suggest a significant slowdown in job creation, with private-sector employment potentially declining over the past three months” [4]. This isn’t the robust labor market the Fed envisioned when it held rates steady in July.

The Fed’s response? A pivot to rate cuts. Market pricing is already pricing in a 97% probability of a 25-basis-point cut at the September 16-17 meeting, per the CME Group’s FedWatch tool [5]. Jerome Powell’s Jackson Hole speech didn’t exactly allay fears either. He acknowledged “rising risks of layoffs” and hinted that the Fed is “open to adjusting policy” if the labor market continues to weaken [3]. This dovish stance is music to the ears of equity bulls.

Let’s talk markets. Historically, rate cuts have been a tailwind for stocks. In August 2025, the S&P 500 hit a record high of 6,502.08, fueled by optimism over Fed easing and strong earnings [5]. Small-cap stocks, in particular, have outperformed, with the Russell 2000 surging 7.1% as investors bet on cheaper borrowing costs boosting corporate profits [6]. But don’t count out bonds. The 10-year Treasury yield has already fallen from 4.37% to 4.23% in August, reflecting a flight to safety and expectations of lower rates [6]. This inverse relationship between rate cuts and bond yields is textbook, and it’s playing out in real time.

However, the devil is in the details. The BLS data has been under scrutiny since the July report’s massive downward revisions—258,000 jobs erased from May and June—raising questions about the reliability of official numbers [1]. Fed officials are now leaning on alternative metrics like the employment-to-population ratio and wage growth to form a “holistic view” of the labor market [4]. This could delay or accelerate rate cuts depending on how these indicators trend.

For investors, the key takeaway is to position for a Fed that’s increasingly willing to cut rates to stave off a recession. Equities in sectors like healthcare and leisure—where job growth remains resilient—could outperform, while bonds, especially long-duration Treasuries, are set to benefit from lower yields [5]. But don’t get too comfortable. A stronger-than-expected jobs report could force the Fed’s hand to keep rates higher for longer, creating volatility in both markets [4].

In the end, the Fed’s rate-cutting path is a balancing act between labor market weakness and inflation risks. With the August report adding to the case for easing, the September meeting is shaping up to be a pivotal moment. As always, stay nimble and keep your eyes on the data.

Source:
[1] Employment Situation Summary - 2025 M07 Results [https://www.bls.gov/news.release/empsit.nr0.htm]
[2] U.S. Unemployment Rate August 2025 - Jobs Report Guide [https://us.plus500.com/en/newsandmarketinsights/us-unemployment-rate-august-2025-jobs-report]
[3] Powell suggests rate cuts are coming — but not because [https://www.cnn.com/business/live-news/fed-powell-jackson-hole]
[4] Speech by Governor Waller on the economic outlook [https://www.federalreserve.gov/newsevents/speech/waller20250828a.htm]
[5] What August Private Sector Jobs Report Means for Rates [https://www.investing.com/analysis/what-august-private-sector-jobs-report-means-for-rates-200666416]
[6] Monthly Market Commentary – September 2025 [https://www.parkavenuesecurities.com/monthly-market-commentary-september-2025]