After a surprisingly weak U.S. payrolls report that underscored that the economy is slowing, investors now see the need for accelerated monetary easing, including an increased chance of a jumbo interest rate cut this month.
Heading into Friday’s employment report, markets were already widely projecting the Federal Reserve to lower its benchmark interest rate by a standard quarter-point at its September 16–17 meeting, which would mark its first reduction in nine months.
Fed Chair Jerome Powell had set the stage for such a move in remarks last month, when he pointed to risks in the labor market.
However, after data showed U.S. jobs grew by a paltry 22,000 in August, well below estimates, market pricing began making room for the possibility of a heftier half-percentage-point reduction, while more easing is now expected through 2025 overall.
“This is two disappointing jobs reports in a row and certainly makes the case for a weakening economy,” said Jack Ablin, founding partner and chief investment officer at Cresset Capital.
“If you combine that with Chairman Powell’s bias toward full employment rather than price stability, it does suggest that the Fed could go more than originally planned.”
The prospect of lower interest rates has been a support for stocks in recent weeks, but equities wavered after Friday’s report. Stock futures jumped initially after the data, before reversing course, with the benchmark S&P 500 last down 0.5%.
“If investors are focused on Fed policy cuts, then that could be supportive of the stock market,” said Jim Baird, chief investment officer with Plante Moran Financial Advisors.
“If investors are instead looking at it as a precursor to further slippage in labor conditions and job losses and perhaps an economy that softens up further from here, that’s not good news for stocks.”
At the same time, investors piled into U.S. Treasuries, sending both short and long-term yields lower. The benchmark U.S. 10-year Treasury yield fell as low as 4.06%, its lowest in about five months. In foreign exchange markets, the prospect of accelerated rate cuts sank the dollar index to a near six-week low.
“We find G10 FX is trading with front-end nominal yields. That’s why the dollar dropped after weaker-than-expected payrolls,” explained Benjamin Ford, researcher at Macro Hive.
As of the afternoon of September 5th, Fed fund futures were baking in a 10% chance of a 50 basis-point reduction later this month, with the 90% balance of probability still on a 25 bp cut, according to LSEG data.
When the Fed began its cutting cycle in September 2024, it started with a half-percentage-point reduction, noted Blair Shwedo, head of investment grade sales and trading at U.S. Bank.
“So I would imagine the market is looking back at that and realizing the Fed is not scared to start out with a more aggressive 50 bp cut,” Shwedo said.
Others see such a move as a potential boost. Mark Malek, chief investment officer at Siebert Financial, argued that a 50 basis-point cut “would add a tailwind to the (stock) market. It would definitely be a boost for the megacap growth stocks, and a green light for investors to take on more risk.”
On the bond side, Slawomir Soroczynski, head of fixed income at Crown Agents Investment Management, warned that such a cut could lead to the “capitulation” of short bets for the front-end part of the Treasury curve, which may exacerbate volatility in the bond market.
Still, the prospect of more aggressive easing could also heighten inflation fears. Current inflation rates remain above the Fed’s 2% target, and Powell and other Fed officials have expressed concern that President Donald Trump’s tariffs could push prices higher.
“Powell’s concern is there’s still tariff uncertainty, and he knows that from an inflation standpoint the increase in risk sentiment will certainly spur asset price inflation,” said George Cipolloni, portfolio manager at Penn Mutual Asset Management. “Now will it spur consumer price inflation? That’s the tug of war.”
Not everyone, however, was convinced that a hefty cut was imminent after the jobs data. August is traditionally considered a “noisy month,” with figures that often get revised higher, noted Phil Blancato, chief executive officer of Ladenburg Thalmann Asset Management.
In addition, more data will arrive before the Fed’s meeting, particularly the next August Consumer Price Index report on September 17, which will offer another important read on inflation trends.
“Inflation is still a major concern and is not being tamed by the slower economic growth,” added Melissa Brown, managing director of investment decision research at Simcorp.
