Weak Employment Data Sparks Expectations of More Aggressive Rate Cuts in the U.S.

Following a surprisingly weak U.S. payroll report that highlighted signs of economic slowdown, investors are increasingly expecting the Federal Reserve to move more aggressively on monetary policy, including the possibility of a substantial rate cut later this month.

Before Friday’s employment data, investors widely anticipated that the Fed would lower its benchmark interest rate by a quarter percentage point during its September 16-17 meeting — marking the first cut in nine months. Fed Chair Jerome Powell had hinted at labor market risks last month, setting the stage for such action.

However, with U.S. payrolls posting a modest gain of just 22,000 jobs in August — far below expectations — market pricing shifted toward the possibility of a larger half-percentage-point cut, with further cuts now expected through 2025.

Jack Ablin, Founding Partner and Chief Investment Officer at Cresset Capital, noted, “This is the second disappointing jobs report in a row and clearly signals a weakening economy. When combined with Chair Powell’s tilt toward full employment over price stability, it suggests the Fed may move well beyond its original plan.”

In recent weeks, the prospect of lower rates has supported equities, though Friday’s report triggered volatility. Stock futures initially surged but later pulled back, with the benchmark S&P 500 (.SPX) last down 0.5%.

Jim Baird, Chief Investment Officer at Plante Moran Financial Advisors, remarked, “If investors are focusing on Fed rate cuts, it could be supportive for equities. But if they interpret the data as a sign of worsening labor conditions, job losses, and broader economic weakness, that’s not positive news for stocks.”

Investors flocked to U.S. Treasuries, pushing yields lower across both short- and long-term maturities. The benchmark 10-year yield fell to 4.06%, its lowest in nearly five months. Meanwhile, in currency markets, the likelihood of swift rate cuts drove the dollar index (.DXY) lower, reaching fresh six-week lows.

Benjamin Ford, a researcher at Macro Hive, explained, “We’re seeing G10 FX trading on front-end nominal yields. That’s why the weaker-than-expected payrolls led to a weaker dollar. The sharp drop in payrolls is clearly reflected in the markets.”

According to LSEG data, by Friday afternoon, Fed Funds Futures priced a 10% chance of a half-point cut and a 90% chance of a quarter-point cut by the end of this month.

Blair Schwado, Head of Investment Grade Sales & Trading at U.S. Bank, pointed out that when the Fed began its cut cycle in September 2024, it did so with a half-point cut. “So I think the market is taking note and recognizing the Fed wouldn’t hesitate to start with a more aggressive 50 basis point cut.”

Mark Malek, Chief Investment Officer at Sebert Financial, said, “A half-point cut would certainly boost the market. It would especially lift mega-cap growth stocks and signal to investors that it’s safe to take on more risk.”

However, Slawomir Sorokinski, Head of Fixed Income at A Crown Agents Investment Management, warned that such a cut could lead to a “capitulation of short bets on the front end of the Treasury curve,” potentially increasing bond market volatility.

Concerns about inflation remain, as current rates are still above the Fed’s 2% target. Powell and other Fed officials are wary of price spikes from potential tariff increases under President Donald Trump’s policies.

George Cipolloni, Portfolio Manager at Penn Mutual Asset Management, said, “Powell’s worry continues to center on tariff uncertainty. He understands that rising risk sentiment around inflation could fuel asset price inflation. The question now is whether it will feed into consumer price inflation — that’s the tug of war.”

Not everyone is convinced that a deep rate cut is imminent. Phil Blancato, CEO at Ladenburg Thalmann Asset Management, pointed out that “August is a noisy month,” with data frequently subject to revisions.

More data releases are expected before the Fed’s meeting, especially the August Consumer Price Index report due next Thursday, which will offer further insight into inflation trends.

Melissa Brown, Managing Director of Investment Decision Research at SimCorp, added, “Inflation remains a major concern and hasn’t been fully tamed, despite slowing economic growth.”