Is a Cooling Jobs Market Signaling an Imminent Fed Rate Cut?

Federal Reserve officials were already expected to cut interest rates next week, but recent data showing persistent weakness in the jobs market and easing inflation concerns may allow them to end months of debate over stagflation risks.

Officials' rhetoric began to shift over the summer. In July, two Fed governors argued for rate cuts due to concerns about risks to the jobs market, the first internal split for the Fed. Subsequently, other officials began to downplay inflation and focus more on the risk of an economic slowdown and job losses.

As the Fed's September 16-17 meeting approaches, the latest data revealed that the unemployment rate in August rose to 4.3% and that jobs were actually lost in June after revisions. If this data had been available in June, it might have been enough to influence the Fed's decision on July 30, when the Fed decided to keep the benchmark interest rate in the 4.25%-4.50% range (where it has been since last December).

Additionally, a benchmark revision to jobs data released this week showed that the number of jobs added over the year ending in March of this year was nearly 1 million fewer than initially reported.

While the August Consumer Price Index (CPI), released on Thursday, was higher than the previous month, a surge in initial jobless claims in the latest week is another signal of a cooling jobs market.

The current situation is similar to last summer when slowing job growth and negative revisions to prior data led the Fed to cut interest rates by 50 basis points at its September meeting. Although market analysts, including 105 of 107 economists in a recent Reuters poll, expect only a 25 basis point cut next week, the latest data may prompt officials to adjust their expectations – from “forestalling inflation” to “protecting the jobs market” – and thus predict a faster, steadier pace of rate cuts.

“The Fed should cut by 50 [basis points] next week… the labor market is cooling at a far faster pace than it was at the start of the year, the underemployment rate is rising at a quicker pace than the unemployment rate itself, tariff passthrough is less than anticipated and inflation expectations are behaving in a well-behaved fashion,” wrote Neil Dutta, chief economist at Renaissance Macro Research, in a note.

But Dutta added that he expects the Fed's policy-setting Federal Open Market Committee (FOMC) to compromise and only cut rates by 25 basis points, “but with a more forceful commitment to providing support to the labor market.”

That commitment may show up in policymakers’ updated economic projections, which will now cover inflation, unemployment, and Fed policy rate forecasts through the end of this year and through 2028. Those quarterly forecasts will be released along with the latest policy statement next week.

Against a backdrop of President Trump demanding rate cuts and taking steps to influence the Fed, including attempting to oust Fed Governor Lisa Cook, these projections are important “market calibration tools.”

The last quarterly projections, released in June, showed Fed officials expecting to cut interest rates twice this year (25 basis points each), but seven of 19 officials not expecting any cuts – at a time when they were concerned that Trump’s tariff policies might complicate efforts to “get inflation back to the 2% goal.”

Previously, there was even talk within the Fed and financial markets about “stagflation risk,” the phenomenon of high inflation coexisting with high unemployment and stagnant economic growth. The last time that occurred in the U.S. was in the 1970s and early 1980s.

But data this summer has eased those concerns, while at the same time making people increasingly uneasy about the direction of the jobs market.

Fed Late to Recognize Shift in Balance of Risks

From a data perspective, tariff passthrough to consumer prices has been more muted than anticipated. Although inflation is projected to accelerate this year, and the inflation rate at the end of 2025 is likely to be a percentage point or more above the Fed’s target, policymakers have gradually accepted the idea that tariff-driven price increases are a one-off shock they can largely ignore.

Fed Chair Powell said last month at a Fed research conference in Wyoming that this view was a “reasonable baseline assumption.” The latest data also confirms that the economic drag from increased tariffs and immigration restrictions may outweigh their impact on consumer prices.

At the same time, recent benchmark revisions to jobs data have shown that the number of jobs added at the start of 2025 was far lower than previously expected – the start of 2025 being a key point: when officials decided to pause planned multiple rate cuts that year due to concerns that tariffs might reignite inflation.

Based on statistical data available at the time, the jobs market was not causing concern. But excluding the final two months of 2024 (when upbeat corporate sentiment drove hiring surges after Trump was elected in November), revisions show that average jobs added per month between April 2024 and August 2025 may have been just 40,000 – which, for the U.S. economy, is close to stagnation.

The unemployment rate has remained relatively low only because immigration restrictions have also slowed the growth of the labor supply.

Other warning signs are also increasing: The scope of hiring across industries has narrowed to pre-recession levels; and data released along with the latest jobs data revision showed that the number of large U.S. counties adding jobs has fallen to its lowest level in 14 years excluding the Covid pandemic.

The Black unemployment rate has surged from 6% in the first full month after Trump returned to the White House (February) to 7.5% in August, an indicator that usually rises first when the economy slows. By contrast, the White unemployment rate has edged down from 3.8% in February to 3.7%.

Black Unemployment Rate Surges

Fed Stance: Cautious Rate Cuts, No Commitment to Sustained Easing

Vincent Reinhart, chief economist at BNY Investments and a former Fed official, said that given that inflation is projected to accelerate this year, the Fed will not declare “victory over inflation” next week, nor will it even offer a clear commitment to a timeline for cutting interest rates.

He said that Fed officials are willing to cut interest rates by 25 basis points, but “I think they would define that as a ‘policy calibration’” – after they concluded that tariffs would have less of an impact on prices than anticipated, and are unlikely to cause sustained inflation. But “it’s not time yet to commit to sustained rate cuts… I don’t think the current macro[economic] [situation] needs sustained rate cuts, and I don’t think the [committee] wants it, at least not the majority of the members.”

In fact, consumer spending has been better than expected, and growth in investments in artificial intelligence has also boosted output.

But slowing job growth is also an undeniable fact.

Francesco Renna, an economist at Chmura Economics & Analytics, said his firm’s JobsEQ database shows that the current number of job openings is down more than 7% year-on-year, and 27.1% versus 2023, a “significant” drop. “US job growth really is losing momentum,” he said.

Job Openings Plummet