The Federal Open Market Committee may elect to cut interest rates more aggressively after a string of weaker than expected jobs news in recent weeks. A September interest rate cut has been anticipated by fixed income markets for some time. However, now there’s a small chance of a larger 0.5% cut in September.
The base case, for now, is that cuts will also follow in October and December. Therefore, the FOMC may cut interest rates at all three remaining scheduled meetings of 2025 if fixed income markets are correct. That could leave short-term interest rates ending the year at 3.5% to 3.75% down from 4.25% to 4.5% today.
Weakening Jobs Data
Recent U.S. jobs data has been generally soft on two dimensions. First, reported job growth for August was low with an increase in nonfarm payrolls of 22,000. Second, and perhaps more concerning to markets, has been significant negative revisions to prior months’ data. That’s occurred as the Bureau of Labor Statistics routinely update their survey-based estimates with the latest available data. For example, the most August’s Employment Situation Summary as released on September 5 stated that nonfarm payroll employment has, “has shown little change since April.”
On September 9, the BLS revised employment for March 2025 down further, though this statistical revision doesn’t necessarily represent a recent deterioration in job growth in recent months but does point to an overall labor market generally less robust than previously estimated. Still, the trend is that job growth appears to be slowing.
Changing Priorities For The FOMC
In recent years, the FOMC has generally seen a healthy labor market, enabling policymakers to focus primarily on inflation that has been running above target. Now that may be changing, inflation is still above target but the FOMC is likely to be concerned about the labor market running out of steam. Elevated inflation typically prompts the FOMC to raise rates, rising unemployment often brings interest rate cuts.
Labor market fears are prompting the fixed income market to project that the FOMC may embark on a renewed round of interest rate cuts starting at the upcoming decision on September 17 and perhaps continuing for subsequent scheduled announcements on October 29 and December 10.
Caveats To Jobs Data
Although job growth appears to have slowed, there are some important nuances that policymakers will consider. The first is that the administration’s focus on deportations and limiting immigration may be shrinking certain portions of the overall U.S. labor force. As such some slowing of job creation may be expected, though the magnitude of this impact is complex to assess.
The second is that although job growth is slowing, growth still appears positive and not in absolute decline. Therefore, we may be seeing a period of slower growth rather than a recession. If a recession were to occur, the FOMC might cut interest rates aggressively, but there is no clear evidence of that currently. For example, the Atlanta Fed’s nowcast statistical model of third quarter growth suggest healthy growth of 3% and the chance of U.S. recession in 2025 stands at just 8% according to prediction market Kalshi.
What To Expect
The FOMC is expected to cut interest rates on September 17 on most estimates. However, recent weaker jobs figures suggest September’s meeting might be the start of a string of interest rate cuts according to fixed income market projections.