Markets now price 95% chance of Fed September rate cut amid dovish shift and revised jobs data

Markets are now pricing in an almost certain September rate cut by the Federal Reserve, as a growing number of central bankers have shifted their stance in response to a significant downward revision in U.S. employment data. This shift marks a pivotal moment in the Fed’s policy trajectory, with officials such as Minneapolis Fed President Neel Kashkari and San Francisco Fed President Mary Daly recently coming out in favor of easing monetary conditions. The revised labor market data, which showed a 258,000 downward revision in nonfarm payrolls and an increase in the unemployment rate to 4.2%, has sparked renewed debate within the Federal Open Market Committee (FOMC) over the balance between inflation and employment goals [1].

Kashkari, traditionally considered a hawk, stated in a recent interview that the current data suggests a slowing economy and that it might soon be appropriate to adjust the federal funds rate. He emphasized the importance of near-term economic indicators, noting that the Fed should not over-rely on uncertain data. Daly echoed Kashkari’s sentiment, stating that the risks to employment and inflation goals are now balanced and that further easing could be necessary to prevent an unwelcome slowdown in the labor market [1].

Deutsche Bank’s Jim Reid highlighted the rapid shift in market expectations, with the probability of a September rate cut rising from 90% to 95% following the revised jobs report. Investors are now pricing in a 60 basis point reduction by the December meeting [1]. CME Group’s FedWatch tool also reflects this shift, showing 93.4% of traders expect a rate cut to 4%–4.25% in September, while only 6.6% anticipate a hold [1].

The dovish turn has been further reinforced by the recent comments of Federal Reserve Governor Lisa Cook, who described the labor market data as “concerning” and noted that such revisions are often indicative of turning points in the economic cycle. Additionally, Governor Chris Waller and FOMC member Michelle Bowman, who had previously advocated for cuts, are now joined by other prominent voices in favor of easing [1].

Wharton professor and senior economist Jeremy Siegel has also joined the chorus, predicting a 25-basis-point cut at the September 18 FOMC meeting. He argues that a slower, yet decisive, easing path will help maintain the support of the Fed’s hawks while addressing the cooling real economy. Siegel’s forecast includes further cuts in November and December, bringing the fed funds rate down to 3.58% by year-end [1].

While Goldman Sachs’ Jan Hatzius maintains a similar view—projecting three 25-basis-point cuts in September, October, and December—he cautions that a delay remains possible if upcoming inflation data surprises on the upside or the labor market rebounds. However, he also acknowledges that a 50-basis-point cut in September could occur if the August jobs report shows a further rise in unemployment or a sharp increase in initial jobless claims [1].

The political implications of the Fed’s next move are also drawing attention. Siegel and others warn that if Powell delays action in the face of a weakening economy, the Fed’s independence could be undermined. In a politically charged environment, a Republican-led Congress may impose structural changes to the central bank’s mandate, particularly if growth falters and the Fed is perceived as not acting aggressively enough [1].

The market’s expectations, meanwhile, continue to evolve. While 2-year Treasury yields rose slightly following the news, 10- and 30-year yields remained on an upward trajectory, reaching 4.24% and 4.8%, respectively [1]. This suggests that while short-term easing is priced in, long-term expectations for inflation remain elevated.

As the September meeting approaches, the Fed faces a delicate balancing act: it must respond to a weakening labor market without risking a resurgence in inflation. With more dovish voices emerging and market expectations firmly set on a rate cut, the central bank may soon find itself with little choice but to ease. The coming weeks will be closely watched for any further signals, particularly during the Jackson Hole Symposium, where Fed officials are expected to provide additional insights into their policy outlook [1].

Source: [1] Markets are near-certain of a September rate cut as more Fed presidents turn dovish overnight (https://fortune.com/2025/08/07/markets-fed-september-rate-cut-kashkari-daly-cook-dovish/)