The Fed’s Jobs Dilemma Forces Rate Cut Reckoning

The Federal Reserve is now widely expected to reduce its benchmark interest rate by at least 25 basis points during its policy meeting in mid-September, following a weaker-than-expected August jobs report. The report showed nonfarm payrolls increasing by only 22,000, far below the projected 75,000, while the unemployment rate rose to 4.3%, the highest since October 2021. This data has shifted the market’s focus from uncertainty to near-certainty regarding a rate cut, as the CME Group's FedWatch tool now reflects a 92% probability of a 25-basis-point reduction [1]. A larger 50-basis-point cut has also gained traction, with futures indicating a 14% likelihood of such a move, up from negligible levels previously [1].

Analysts have highlighted the growing pressure on the Fed to act decisively to support the labor market, which has shown signs of slowing over the past several months. Jamie Cox of Harris Financial Group noted that the “Fed’s free pass on the labor market has ended,” while Preston Caldwell of Morningstar emphasized that the rate cut at the September meeting is now “virtually guaranteed” [1]. This shift reflects the Fed’s evolving risk calculus, where the potential for rising unemployment has taken precedence over concerns about inflation, which remains above the central bank’s 2% target [1].

The debate over the magnitude of the rate cut remains active among economists. Some, like Kevin Hassett, a senior economic advisor in the White House and potential future Fed chair, suggest that a 50-basis-point cut is being considered but is unlikely to materialize [2]. Others, including Larry Werther of Daiwa Capital Markets, caution that the labor market’s weakness is not yet severe enough to justify an aggressive move, given ongoing inflationary pressures from factors such as President Donald Trump’s proposed tariffs [2]. Joseph Brusuelas of RSM similarly argued that a half-point cut would be premature unless there are significant downward revisions in inflation data [2].

Despite the uncertainty around the size of the rate cut, markets have already begun pricing in a more accommodative policy path for the Fed. The yield on the 10-year Treasury has fallen in response to expectations of lower borrowing costs, while the EUR/USD exchange rate has risen to above 1.1700, reflecting the US Dollar’s weakening against the Euro [3]. The European Central Bank is expected to keep interest rates unchanged at its upcoming meeting, contrasting with the Fed’s anticipated easing [3]. This divergence in monetary policy trajectories has increased the appeal of the Euro, particularly as the ECB maintains a cautious stance on rate cuts [3].

Looking ahead, the September meeting will be a critical juncture for the Fed as it weighs the trade-offs between supporting employment and managing inflation. Further revisions to labor market data could influence the decision, with some analysts suggesting that a larger-than-expected downward adjustment to past payroll figures could strengthen the case for a 50-basis-point cut. For now, however, the consensus among Wall Street economists remains that a 25-basis-point reduction is the most likely outcome, followed by additional cuts in December and beyond as the economic environment continues to evolve [2].

Source:

[1] Fed Rate Cut Now Appears Certain After Weak Jobs Report (https://www.investopedia.com/job-report-seals-federal-reserve-interest-rate-cut-in-september-11804268)

[2] 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/)

[3] EUR/USD remains above 1.1700 amid rising Fed rate cut (https://www.fxstreet.com/news/eur-usd-remains-above-11700-amid-rising-fed-rate-cut-bets-202509080115)