Is a Fed Rate Cut on the Horizon?

The only thing that could stop the Federal Reserve from cutting interest rates in a matter of weeks may be a surprisingly strong US jobs report—but that seems unlikely. Since the Trump administration launched the largest trade war in decades, the US labor market has cooled significantly since spring. Although trade disputes have gradually subsided, the pace at which companies are adding new jobs has not seen a significant acceleration. Between May and July, the US economy added an average of only 35,000 jobs per month, the lowest three-month growth rate since the 2020 pandemic. Wall Street's expectations for the August job market are also pessimistic. A Wall Street Journal survey of top economists suggests that only 75,000 jobs were added last month, and the unemployment rate could rise from 4.2% to 4.3%, a nearly four-year high. Fed Chairman Jerome Powell, in a highly watched speech last week, pointed out that the deterioration in the labor market was enough to support a near-term rate cut. He emphasized that "downside risks to the labor market are rising" and suggested that the Fed may allow inflation to temporarily exceed its 2% target to avoid a labor market collapse. This statement was interpreted by the market as a "dovish" signal. Chicago Mercantile Exchange data show that market expectations for a September rate cut have risen to 90%. Ellen Zentner, Chief US Economist at Morgan Stanley Wealth Management, wrote in a report: “The Fed has opened the door to a rate cut, but the size of the cut will depend on whether labor market weakness continues to look greater than the risk of rising inflation.”

Volatility in US Jobs Numbers

It is worth noting that the US government's jobs report has recently experienced frequent and significant revisions. For example, the 291,000 new jobs initially reported for May and June were revised to just 33,000, a massive 88.6% revision. These data discrepancies prompted Trump to take the unprecedented step of firing the Bureau of Labor Statistics director responsible for preparing the report. Fed Governor Christopher Waller noted that "private sector job growth is nearing stagnation" and called for an immediate rate cut to address potential risks. According to the quarterly Employment and Wages Survey due to be released on September 9, job growth data for the period from April 2024 to March 2025 may be significantly revised downward. Wall Street predicts that job growth in this period may be overstated by as much as 800,000 jobs, meaning that the previously seemingly strong job market may be overstated.

The Delicate Balance Between Inflation and Jobs

The Fed, as we know, faces a dual mandate: controlling inflation and promoting employment. Although the core CPI rose 3.1% year-on-year in July, still above the 2% target, Powell made it clear in his speech that he prioritized employment risks. David Stubbs, chief investment strategist at AlphaCore Wealth Advisory, told MarketWatch that the balance between jobs and inflation seems to be what the market is most focused on, but both involve uncertainty. He pointed out that the PCE data released last Friday was largely in line with expectations, which may make the labor market receive more attention. Bill Adams, chief economist at United Bank, said that the best-case scenario for financial markets is that the upcoming jobs report shows a moderate increase in jobs and a slight increase in the unemployment rate. This would indicate that the economy has not entered a recession, but also indicates that there is enough weakness in the labor market to justify a rate cut by the Federal Reserve. On the other hand, the worst-case scenario is that the jobs report shows a decrease in jobs, a decrease in the labor force participation rate, and a decrease in the unemployment rate. This would mean that the labor supply is decreasing, and at the same time, the demand for labor is also weakening, which may be something the Federal Reserve cannot cope with. With the Fed likely to cut rates in September, investors will begin anew trying to determine when "bad news is good news" and when "bad news is just bad news." That is, when will weak economic data give the Fed room to cut rates further (good for stocks), and when will weak economic data trigger growth fears (bad for stocks)? This may come down to why the Fed is cutting rates, and what will happen after the rate cut.