September Fed Rate Cut: Weak Jobs Report Fuels 90% Probability

Market expectations for a Federal Reserve interest rate cut in September have surged dramatically, primarily driven by a recent U.S. jobs report that came in weaker than anticipated. This significant shift marks a potential pivot from the central bank’s steadfast position on monetary policy throughout the year, as investors now foresee an imminent easing cycle following a period of sustained stability.

• The probability of a 25-basis-point Fed rate cut in September escalated to 90.4% following the jobs report.
• The U.S. economy added only 73,000 jobs in July, significantly below the 110,000 economist estimate.
• Previous employment figures for May and June were revised downward by a combined 258,000 jobs.
• The Federal Open Market Committee (FOMC) maintained stable interest rates across all five meetings this year, including July.
• The July FOMC meeting saw an unusual dissent, with two governors advocating for a rate reduction.

Federal Reserve’s Consistent Stance and Emerging Dissent

The Federal Open Market Committee (FOMC) has maintained stable interest rates across all five of its meetings this year, including its recent July session. This policy has been consistently held despite persistent inflation remaining above the Fed’s 2% target, a challenge further complicated by the potential for tariffs to elevate price levels. Notably, the July meeting witnessed an unusual dissent, with two Fed governors advocating for a rate reduction. This rare occurrence reflects an internal divergence on monetary strategy not seen in decades, signaling potential cracks in the unified front previously presented by the central bank.

Economic Indicators and Initial Market Interpretations

Earlier economic indicators had offered mixed interpretations, initially tempering expectations for an immediate rate cut. The personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, indicated a rise in June, with headline PCE reaching 2.6% annually and core PCE at 2.8%. This uptick in inflation figures initially led markets to decrease the perceived likelihood of a September cut. Furthermore, Federal Reserve Chair Jerome Powell’s comments following the July meeting, where he described the labor market as “broadly in balance” and noted U.S. companies and consumers largely bearing the cost of tariffs, were initially interpreted as relatively hawkish, further dampening rate cut expectations.

The Pivotal Shift: July Jobs Report Impact

However, the economic landscape dramatically shifted with the release of the July jobs report, which showed a mere 73,000 jobs added, significantly below the 110,000 economist estimate by LSEG. Compounding this weak figure were substantial downward revisions for May and June employment figures, totaling 258,000 fewer jobs than previously reported. This pivotal data point underscored a definitive cooling in the labor market and immediately reignited market speculation, propelling the probability of a 25-basis-point rate cut in September to 90.4%, according to the CME FedWatch tool. Amidst these monetary policy deliberations, President Donald Trump has voiced strong criticism of Chair Powell, advocating for the Federal Reserve Board to assume direct control over policy decisions.