Markets Bet on More Fed Interest Rate Cuts After Another Weak Jobs Report

Key Takeaways

• The labor market continues to weaken, with the US economy adding just 22,000 jobs in August.
• That weak data prompted bond traders to dial up expectations for interest rate cuts.
• Markets are now pricing in three quarter-point interest rate cuts by the Fed’s December meeting.

Expectations for Federal Reserve interest rate cuts jumped Friday in the wake of new data showing the US economy added just 22,000 jobs in August—far fewer than economists expected. The report follows another surprisingly weak release in July.

For much of the past year, the Fed has held interest rates steady between 4.25% and 4.50% as officials awaited more improvement on inflation, which has remained stubbornly above-target thanks in part to President Donald Trump’s new tariffs. For months, central bank officials have pointed to a stable employment picture as evidence that rates could remain at current, somewhat restrictive levels without damaging the economy. Now, a shuddering labor market is seen as changing the equation.

“Despite lingering uncertainty around inflation, the weakness in the labor market is too significant for the Fed to ignore,” says Kevin O’Neil, associate portfolio manager and senior research analyst at Brandywine Global.

“This report is supportive of additional and faster rate cuts beyond September,” adds Jeff Schulze, head of economic and market strategy at ClearBridge Investments.

Market Looks for More Rate Cuts

In the bond market, futures traders now see a roughly 65% chance that the Fed will cut rates by 0.75 percentage points by its December meeting—up from 46% odds on Sept. 4, the day before the jobs data was released, according to data from the CME FedWatch Tool. That would amount to three 0.25-percentage-point cuts.

“If the data continue to follow recent trends, the Fed may be heading toward a path that sees them cut rates at each of its meetings through year-end, but there is still a lot more data to digest before then,” says Jason Pride, chief of investment strategy and research at Glenmede.

Traders also see a 100% chance of a rate cut in September, adds Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth. That’s up from roughly 67% odds a month ago.

“Chairman Powell effectively set the stage for additional rate cuts during his speech at the Jackson Hole economic summit on Aug. 22,” Pappalardo adds, referring to the Fed chair’s recent comments signaling that an adjustment to the central bank’s policy stance “may be warranted” given the shifting balance of risks with respect to the labor market.