Fed Easing Looms as Labor Market Cools and Markets Price in Rate Cut

The U.S. Federal Reserve appears poised to ease monetary policy in response to slowing labor market conditions, with markets widely anticipating a rate cut in September 2025. Federal Reserve Chair Jerome Powell's recent remarks at the Jackson Hole Economic Policy Symposium signaled a cautious shift toward easing, emphasizing that the current policy stance remains restrictive amid a balanced but evolving risk environment. Powell noted that while inflation remains above the 2% target, the risks are increasingly skewed toward the labor market, with slowing job creation and stable unemployment figures suggesting rising downside risks to employment [3].

The U.S. economy is currently growing at a moderate pace of 1.2%, down from 2.5% in 2024, with consumer spending slowing as a drag on growth. Inflation has eased from its pandemic-era highs but remains elevated, partially due to higher tariffs, which have pushed up prices in certain goods categories. The labor market, though still strong, has seen a gradual cooling, with slower payroll gains and easing wage pressures. These conditions have prompted market participants to read Powell’s comments as an endorsement of a rate cut at the Fed’s upcoming September meeting [3].

According to the CME FedWatch tool, the probability of a 25-basis-point rate cut at the September meeting rose to 87% following Powell’s speech, from 75% the week prior. This anticipation has already had tangible effects in financial markets. For example, the 30-year fixed-rate mortgage average fell to 6.59% in late August, down from 6.87% in early July, ahead of any official Fed action. Analysts suggest that the market is discounting the expected easing, with longer-term interest rates already adjusting in response to the Fed's potential policy shift [2].

In addition to mortgage rates, the U.S. dollar has come under pressure. China’s yuan, for instance, rose to its highest level in ten months against the dollar, supported by expectations of lower U.S. interest rates and a surge in capital inflows into Chinese assets. The onshore yuan has appreciated over 2% year-to-date, while the offshore version has climbed nearly 3%. This move has been further bolstered by the People’s Bank of China setting a stronger daily midpoint for the currency and by capital inflows into A-shares and Chinese exports converting dollars into yuan [4].

The global financial markets have also responded to the Fed's signals. Asian equities, including the Nikkei 225 and the Kospi, saw gains as the dollar weakened and technology stocks rebounded on Wall Street. However, Chinese markets, including the Shanghai Composite and Hang Seng, bucked the trend, declining amid concerns over regulatory interventions and liquidity dynamics. In the U.S., Treasury yields fell following Powell’s speech, with the 10-year yield dropping to 4.22% as markets priced in the possibility of rate easing. Fixed-income markets also saw a steepening yield curve, with front-end yields declining more sharply than longer-term yields [5].

The implications for various asset classes are beginning to materialize. Equity markets, particularly in cyclical sectors and small-cap stocks, have benefited from lower discount rate expectations. Credit markets have also shown signs of improvement, with credit spreads narrowing as refinancing risks recede. However, the extent of these benefits depends on the pace of Fed easing and whether incoming economic data confirms the current outlook. Analysts from major banks, including Barclays and BNP Paribas, have revised their forecasts to include a 25-basis-point cut in September, followed by further easing later in the year [3].

While the Fed has signaled a flexible and data-driven approach to its policy decisions, the possibility of renewed inflation could delay or scale back the easing cycle. The central bank has reaffirmed its commitment to a 2% inflation target and emphasized that the revised policy framework allows for proactive action on either side of its dual mandate. However, the higher neutral rate and structural changes in the economy suggest that a long-duration rally is unlikely, and the potential for extended easing is constrained by the need to balance inflation and employment risks [3].

Source: [1] This Wall Street heavyweight predicts interest rates could go even lower than markets think (https://www.marketwatch.com/story/this-wall-st-heavyweight-predicts-interest-rates-could-go-even-lower-than-markets-think-879a4748) [2] Mortgage Rates Fall on Fed Cut Speculation (https://www.floridarealtors.org/news-media/news-articles/2025/09/mortgage-rates-fall-fed-cut-speculation) [3] Jackson Hole 2025: Powell Hinting at Rate Cuts? (https://arc-group.com/jackson-hole-2025-powell-rate-cuts/) [4] China's Yuan Firms Up Against The Dollar As Fed Cut Hopes Rise (https://finimize.com/content/chinas-yuan-firms-up-against-the-dollar-as-fed-cut-hopes-rise) [5] Asian shares are higher after Wall Street steadies itself as ... (https://finance.yahoo.com/news/asian-shares-higher-wall-street-042640219.html)