Fed's Next Move Hinges on August's "Jobless Wound"

The U.S. labor market showed signs of continued softness in August 2025, as nonfarm payrolls rose by only 22,000, far below the 75,000 forecast, and the unemployment rate edged up to 4.3% from 4.2% the prior month [1]. This marked the second consecutive month of weak employment data, with the previous month's figure revised upward to 79,000, while June's figure was revised down to 14,000. The cumulative effect of these revisions indicates a net loss of 13,000 jobs over the two months, amplifying concerns about the labor market's underlying momentum [2].

Key sectors reflected divergent trends, with job gains in health care (+31,000) and social assistance (+16,000), while losses were recorded in federal government (-15,000) and mining, quarrying, and oil and gas extraction (-6,000). The government job declines were attributed to spending cuts under the White House, while manufacturing and wholesale trade also experienced declines of 12,000 each [1]. The labor force participation rate remained unchanged at 62.3%, and the employment-population ratio held steady at 59.6%, while the number of long-term unemployed individuals rose by 385,000 year-over-year [1].

Wage growth was relatively stable, with average hourly earnings for all employees on private nonfarm payrolls increasing by 0.3% in August, matching expectations. Over the past 12 months, average hourly earnings rose by 3.7%, slightly below the 3.9% recorded in the previous year [1]. The modest wage growth suggests that inflationary pressures may be easing, which could support the Federal Reserve’s efforts to bring inflation back to its 2% target.

The weak labor market data intensified expectations for a Federal Reserve rate cut at the upcoming September meeting. According to the CME FedWatch tool, futures markets priced in a 100% probability of a 25-basis-point cut and a 14% chance of a 50-basis-point reduction [3]. This follows similar expectations after the July jobs report, which had revised downward and contributed to a growing consensus that the central bank may need to ease monetary policy to support economic growth. Traders and analysts also pointed to the August jobs report as a potential catalyst for an immediate rate cut to stabilize investor confidence and mitigate broader economic risks [3].

Markets responded swiftly to the employment report, with the U.S. Dollar index (DXY) dropping 0.70% to 97.57, while the EUR/USD pair surged to a five-week high of 1.1714 [4]. The sell-off in the U.S. Dollar reflected heightened bets that the Federal Reserve would soon begin its easing cycle, particularly in light of the broader macroeconomic uncertainties surrounding trade policies, immigration, and potential legal challenges to tariffs. Meanwhile, gold prices reached record highs, with investors seeking safe-haven assets as the probability of a rate cut increased [3].

Looking ahead, the focus will shift to the release of U.S. producer price index (PPI) and consumer price index (CPI) data, which will offer further insight into inflation trends and reinforce or weaken the case for rate cuts [3]. The European Central Bank is also expected to maintain a cautious stance, with a 91% probability of keeping interest rates unchanged during its next meeting, as the Eurozone shows early signs of economic recovery [4].

The August labor report underscores the growing pressure on the Federal Reserve to respond to a cooling labor market while balancing its dual mandate of price stability and maximum employment. With weak job creation, modest wage growth, and an expanding labor force, the case for accommodative monetary policy has gained considerable traction among traders, analysts, and policymakers alike.

Source:

[1] Employment Situation Summary - 2025 M08 Results (https://www.bls.gov/news.release/empsit.nr0.htm)

[2] United States Non Farm Payrolls (https://tradingeconomics.com/united-states/non-farm-payrolls)

[3] The Fed ought to patch the wound left by August's jobs report (https://www.cnbc.com/2025/09/08/cnbc-daily-open-the-fed-ought-to-patch-the-wound-left-by-augusts-jobs-report.html)

[4] EUR/USD jumps to 1.1714 as weak US jobs data sinks Dollar (https://www.mitrade.com/insights/news/live-news/article-1-1100977-20250906)