Weak U.S. Payrolls Report Raises Interest Rate Cut Speculation

By Lewis Krauskopf and Davide Barbuscia

NEW YORK (Reuters) – After a surprisingly weak U.S. payrolls report that underscored a slowing economy, investors are anticipating accelerated monetary easing, including an increased chance of a jumbo interest rate cut this month.

Heading into Friday’s employment report, investors were widely projecting the Federal Reserve to lower its benchmark interest rate by a standard quarter-point at its September 16-17 meeting, marking its first reduction in nine months. Fed Chair Jerome Powell had previously indicated such a cut was likely due to risks in the labor market.

However, following data revealing that U.S. jobs grew by a mere 22,000 in August, significantly below projections, expectations shifted toward a heftier half-percentage-point reduction, with further easing anticipated through 2025.

“This is two disappointing jobs reports in a row and certainly makes the case for a weakening economy,” stated Jack Ablin, founding partner and chief investment officer at Cresset Capital. He added that Powell’s preference for full employment over price stability suggests the Fed could take more aggressive action than initially planned.

While the prospect of lower interest rates had generally supported stocks, equities fluctuated after Friday’s report. Stock futures initially surged post-data but reversed direction, with the benchmark S&P 500 down 0.5% at last check.

Jim Baird, chief investment officer with Plante Moran Financial Advisors, noted, “If investors are focused on Fed policy cuts, that could support the stock market. However, if they perceive it as a precursor to further economic deterioration, that’s negative for stocks.”

Investors flocked to U.S. Treasuries, reducing both short and long-term yields. The benchmark U.S. 10-year Treasury yield fell to 4.06%, its lowest in about five months. In foreign exchange markets, the expectation of rate cuts pushed the dollar index to a near six-week low.

Benjamin Ford from Macro Hive commented, “G10 FX is trading with front-end nominal yields, which explains the dollar’s drop after the disappointing payrolls report.” Fed fund futures indicated a 10% chance of a 50 basis-point cut this month, with a 90% chance for a 25 bp cut, according to LSEG data.

Blair Shwedo from US Bank noted that when the Fed began its cutting cycle in September 2024, it initiated with a half-percentage-point reduction, suggesting the market recognizes the Fed’s willingness to act aggressively.

Mark Malek of Siebert Financial predicts that a 50 basis-point cut would bolster the stock market and encourage investors to take on more risk. However, such a cut could also trigger volatility in the bond market, according to Slawomir Soroczynski of Crown Agents Investment Management.

The prospect of further aggressive easing raises inflation concerns. Current inflation rates remain above the Fed’s 2% target, with Powell and others wary of tariffs increasing prices.

George Cipolloni from Penn Mutual Asset Management expressed that Powell is concerned about tariff uncertainties and their potential impact on inflation.

Not everyone believes a significant cut is imminent. Phil Blancato, CEO of Ladenburg Thalmann Asset Management, noted that August figures are often revised higher. The upcoming August Consumer Price Index report will provide additional insights into inflation trends ahead of the Fed meeting.

Melissa Brown from Simcorp emphasized that inflation remains a primary concern and is not mitigated by slowing economic growth.