Fed's Rate Cut Debate Intensifies as Jobs Data Deepens Dilemma

Morgan Stanley revised its forecast for Federal Reserve rate cuts, now anticipating two reductions of 25 basis points each in September and October, compared to its previous outlook of cuts in September and December. This adjustment follows the release of weaker-than-expected August employment data, which signaled further deterioration in the labor market. Nonfarm payrolls increased by only 22,000 in August, well below the 75,000 median estimate, and the unemployment rate rose to 4.3%, the highest since October 2021. These developments have prompted bond traders to increase the likelihood of aggressive Fed easing, with futures markets now pricing in a 65% probability of a 0.75 percentage point rate cut by the December meeting, up from 46% on September 4 [1].

The shift in market expectations reflects growing concern over the health of the labor market and its impact on broader economic activity. Analysts have highlighted that the prolonged weakness in hiring and upward trends in unemployment present a compelling case for more accommodative monetary policy. “Despite lingering uncertainty around inflation, the weakness in the labor market is too significant for the Fed to ignore,” said Kevin O’Neil, senior research analyst at Brandywine Global. Similarly, Jeff Schulze from ClearBridge Investments noted that the recent data “supports the case for additional and faster rate cuts beyond September” [1].

While the majority of market participants still expect a 25 basis point cut in September, some analysts and investors are speculating that a larger 50 basis point cut could also be in play. Futures tied to the Fed’s benchmark rate now show an 11.7% probability of a half-point reduction, up from 0% on Thursday. Kevin Hassett, White House National Economic Council director and a potential nominee for Fed chair, acknowledged that “a 50-basis-point cut is now in play,” though he cautioned that such a move remains unlikely [1]. Others, including Larry Werther of Daiwa Capital Markets and Joseph Brusuelas of RSM, argued that the current economic data does not yet justify a jumbo cut, with inflation still above the central bank’s target. “The Fed’s job is getting harder, not easier,” said Brusuelas, noting the competing pressures of price stability and employment goals [1].

Bank of America’s economists also updated their forecasts in response to the August jobs report, now predicting two rate cuts in 2025—one in September and another in December—contrary to their earlier stance of no action until the second half of 2026. Aditya Bhave, one of the lead analysts, stated that “there is now clearer evidence of deterioration in labor demand, not just supply.” The firm’s revised outlook aligns with most Wall Street forecasts and market pricing, with swap contracts fully pricing in a September cut after the release of the data [2]. However, they also expressed caution, noting that “rushing to cut rates could translate into a policy error” in the context of a supply-driven slowdown and rising inflation expectations [2].

President Donald Trump has consistently advocated for faster rate cuts, criticizing Fed Chair Jerome Powell for what he calls a delayed response to economic challenges. Two of the governors Trump appointed—Christopher Waller and Michelle Bowman—dissented from the Fed’s July decision to maintain rates, supporting a cut instead. Meanwhile, regional Fed presidents, including Mary Daly of San Francisco and Raphael Bostic of Atlanta, have shown some support for a September rate reduction. Despite this, not all Fed officials agree, with Cleveland Fed President Beth Hammack arguing that inflation remains too high to justify a cut in September [2].

Source:

[1] Is the Fed ready to go big? Analysts debate jumbo rate cut ... (https://fortune.com/2025/09/05/fed-rate-cuts-50-basis-points-odds-jobs-report-recession)

[2] Bank of America Sees Two Fed Rate Cuts This Year vs. ... (https://www.bloomberg.com/news/articles/2025-09-05/bank-of-america-sees-two-fed-rate-cuts-this-year-vs-none-before)