WASHINGTON (TNND) -- A stumbling labor market has fueled expectations of a rate cut at the Federal Reserve's meeting in two weeks and opened the door to more aggressive and frequent cuts to wrap up the year over concerns the economy may be wobbling off track.
A rate cut at the Federal Open Markets Committee meeting later this month is widely expected, but how aggressive the central bank can and will want to be beyond is an open question. Officials are facing an economy pulling on both sides of its dual mandate with persistent inflation and cooling employment creating a challenging dynamic for them to navigate.
Investors had already been broadly anticipating a quarter percentage point cut at this month's meeting after the August jobs report showed a stalling labor market. A second consecutive lousy report released last week further cemented those expectations and expanded predictions of more frequent decreases this year.
Markets had already priced in a cut at the upcoming meeting but are now seeing the odds of an additional cut in October as more likely. Wall Street also sees a more aggressive 0.5% cut at next week's meeting at a 10% probability -- still a longshot but a noticeable uptick compared to 0% a month ago, according to the CME FedWatch tool.
The first warning sign in the labor market came with massive downward revisions in the data through July that revealed job growth was sputtering under the weight of tariffs and resulting economic uncertainty. Friday's report brought more bad news for workers, with U.S. employers only adding 22,000 jobs in August and a revision to earlier data showing a loss of 13,000 jobs in June -- the first net loss of jobs since the end of 2020.
The U.S. has added fewer than 600,000 jobs so far in 2025, the lowest level since the recovery from the 2008 financial crisis aside from the COVID-induced recession. Manufacturing and construction are also shedding jobs at a rapid pace, a potential warning sign for the direction of the economy.
"We may look back at those last two employment numbers being some somewhat of an inflection point with respect to what the Fed could do," said Russell Rhoads, a clinical associate professor of financial management at Indiana University's Kelley School of Business.
The Fed's benchmark interest rate has been on hold since January at a range of 4.25% to 4.5% after inflation stopped declining. Officials had hoped a more restrictive policy stance would get inflation back to their target of 2% and were cautious to change them amid a trove of uncertainties in trade policy from the White House.
Officials will go into their Sept. 16-17 meeting with a few more data points to influence their decisions on rates in the short term. Two measures of inflation in the producer price index, which tracks wholesale prices that can trickle down to consumers, and the consumer price index that reflects prices people are paying will have new prints this week.
Inflation reports that come in above expectations could complicate the path forward on interest rate cuts. Price increases have been running above the Fed's target of 2% for the last five years and cutting rates at a time of rising prices could make it harder to tame again.
Cutting rates too soon could fuel price pressures by giving consumers and businesses more room to spend, while waiting too long could send the job market and economy into a tailspin. The puzzle the Fed is trying to solve is whether higher inflation or weaker job growth poses a greater risk to the economy.
"Inflation has continued running above what they want. The last thing in the world the Fed wants to do is anything that moves that number higher," Rhoads said. "It's more difficult to manage inflation and that's been behind the reluctance (to cut), but it looks like the economy is slowing to the point of where even if they are worried about inflation, they're going to have to do something to make sure we don't slip into a nasty recession."
In the near term, chairman Jerome Powell and other officials appear to be prioritizing keeping the labor market intact. Powell said during his highly watched speech in Jackson Hole that there are shifting risks in the economy that are building a greater case to preserve employment than to target inflation.
Economists and the Fed are also trying to discern how tariffs will impact price increases and inflation. Some are concerned tariffs could lead to persistent price increases, while others see them as a one-time increase that will not lead to ongoing issues.