Labor Market Woes Force Fed to Contemplate Bolder Rate Cuts

The U.S. labor market’s recent weakening has prompted renewed speculation about aggressive Federal Reserve (Fed) rate cuts, with Barclays now predicting three quarter-point reductions in 2025. The latest jobs report, released in mid-September, showed a disappointing 22,000 jobs added in August—far below the 75,000 estimated by economists—marking a continuation of the slowdown observed in July. The unemployment rate climbed to 4.3%, the highest since October 2021, signaling growing pressures on the Fed to respond. Markets now price in a near certainty of a rate cut at the September 17 policy meeting, with odds rising to 97% as of early September, according to the CME Group’s FedWatch tool [1].

The Fed’s policy outlook has shifted in response to the deteriorating labor market. Chair Jerome Powell has emphasized the increasing risk of rising unemployment and the need to balance this against inflation risks. Inflation remains stubbornly above the Fed’s 2% target, with recent tariffs contributing to persistent price pressures. However, the recent labor data suggest that the Fed may now have more room to ease monetary policy. “The weakness in the labor market is too significant for the Fed to ignore,” said Kevin O’Neil, associate portfolio manager at Brandywine Global, adding that additional and faster rate cuts are likely [2].

Market pricing reflects this view. The probability of a 75-basis-point rate cut by the December meeting has increased to 65%, implying three 25-basis-point cuts, up from 46% on September 4. Traders now see a 100% chance of a September rate cut, up from 67% a month ago [2]. While most Wall Street economists still expect a quarter-point reduction, discussions of a larger 50-basis-point cut have gained traction, particularly in the wake of downward revisions to prior payroll data. Futures tied to the Fed’s benchmark rate now put the odds of a half-point cut at around 11.7%, up from 0% just days earlier [3].

The debate over the appropriate magnitude of the rate cut remains active among analysts. Some argue that a 50-basis-point cut is warranted, given the fragility of the labor market and the potential for a broader economic slowdown. Others caution that inflationary pressures, particularly from recent tariff policies, make such a move premature. “It would take a large downside surprise in the producer price index and consumer price index for a 50-basis-point cut to happen,” said Joseph Brusuelas of RSM [3]. The outcome may ultimately hinge on the next round of payroll data revisions, which could further weaken the labor market’s outlook.

The political implications of a larger rate cut are also being closely watched. A significant move in September could be interpreted as validation of criticism against Fed Chair Powell for acting too slowly. President Donald Trump has repeatedly accused Powell of being “Mr. Too Late,” and a larger-than-expected cut could embolden calls for his replacement. At the same time, the Fed is constrained by its dual mandate of maintaining price stability and maximum employment, with officials wary of reigniting inflationary pressures [3].

Barclays’ forecast of three rate cuts in 2025 aligns with a broader market consensus that the Fed will adopt a more accommodative stance in response to a cooling labor market. The timing and size of these cuts will depend on incoming data and the evolving inflation landscape, but the direction appears clear: easing monetary policy is now a central part of the Fed’s near-term strategy.

Source: [1] Jobs Report August Unemployment Rate Federal Reserve Rate Cut S&P 500 (https://www.investors.com/news/economy/jobs-report-august-unemployment-rate-federal-reserve-rate-cut-sp-500/) [2] Markets Bet on More Fed Interest Rate Cuts After Another Weak Jobs Report (https://www.morningstar.com/economy/markets-bet-more-fed-interest-rate-cuts-after-another-weak-jobs-report) [3] Is the Fed ready to go big? Analysts debate jumbo rate cut odds (https://fortune.com/2025/09/05/fed-rate-cuts-50-basis-points-odds-jobs-report-recession/)