The Fed Walks a Tightrope: Jobs Slump vs. Inflation Risks

The Federal Reserve’s September rate cut appears increasingly likely following a weak jobs report that has shifted the central bank’s focus toward addressing a cooling labor market. Payroll growth in August came in at 22,000, far below the expected 75,000, with the unemployment rate rising to 4.3%, the highest since October 2021. These figures have prompted market participants to begin pricing in a 50-basis-point rate cut, with odds of such a move rising to 11.7% after the data release, up from zero just days earlier [1]. Futures tied to the Fed’s benchmark rate suggest the central bank may be willing to act aggressively, according to some analysts, although others caution that lingering inflationary pressures—partly fueled by tariffs—complicate the case for a large cut [1].

The Fed has faced a tightrope balancing act between its dual mandate of maintaining price stability and fostering maximum employment. While inflation remains above the 2% target, the deteriorating labor market has forced officials to reconsider their stance. Jamie Cox of Harris Financial Group noted that “the Fed’s free pass on the labor market has ended,” signaling a potential shift in the central bank’s risk calculus [1]. The debate has intensified as some economists argue that a 50-basis-point cut could provide an insurance policy against an emerging economic downturn. Kevin Hassett, current director of the White House National Economic Council and a potential nominee for Fed chair, suggested that while a larger cut might be discussed, it is unlikely to be implemented [1].

Market pricing has already moved in anticipation of a more aggressive Fed response. The CME Group’s FedWatch tool indicates a 14% chance of a 50-basis-point cut at the September meeting, with the most probable outcome being a 25-basis-point reduction [2]. Analysts such as Larry Werther of Daiwa Capital Markets and Joseph Brusuelas of RSM have argued that the current data do not justify a half-point cut, with Brusuelas noting that the labor market’s decline is “not yet back to target” in terms of inflation [1]. Still, others like ING’s James Knightley believe that a small but meaningful number of FOMC members could push for a larger cut [1].

The geopolitical and economic implications of a larger rate cut are also being closely scrutinized. A 50-basis-point move would carry significant symbolic weight, potentially validating President Donald Trump’s criticisms of Fed Chair Jerome Powell for delaying action. Such a cut could be seen as a response to a deteriorating economic environment, particularly as the U.S. economy appears to be teetering toward a mild downturn. However, the Fed faces risks on both sides: cutting too much could reignite inflation, while cutting too little may fail to stem rising unemployment [1].

Looking ahead, the next week’s revisions to payroll data will be crucial in determining the Fed’s final decision. If the revisions show a more severe weakening of the labor market than currently reported, the case for a bold rate cut will only strengthen. The market is already factoring in a high probability of a rate cut, and the outcome of the September meeting will likely shape the trajectory of monetary policy for the rest of the year [1].

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] 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)