:max_bytes(150000):strip_icc()/GettyImages-2230651756-a6b5741615e043ff933ddf9c608daffe.jpg "Fed Rate Cut Now Appears Certain After Weak Jobs Report")
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Key Takeaways
- The Federal Reserve is now nearly certain to cut its benchmark interest rate in September by at least 25 basis points and possibly 50.
- A report on the jobs market released Friday showed hiring is slower than expected, giving the Fed reason to boost the job market with lower interest rates.
- Fed officials have been torn between keeping rates high to fight inflation and lowering them to prevent unemployment from rising.
- For now, the Fed may focus more on the threat to the job market rather than the possibility that tariffs will stoke inflation.
In the wake of Friday’s dismal job creation data, financial market participants no longer wonder whether the Federal Reserve will cut its benchmark interest rate at its next meeting in September.
Investors now widely expect the Fed will have to cut interest rates later this month to boost the faltering job market, which added far fewer jobs in August than expected. Market participants are now certain the Federal Reserve will cut its influential interest rate at its next meeting on Sept. 16-17, according to the CME Group’s FedWatch tool, which forecasts movements of the federal funds rate based on fed funds futures trading data.
That certainty has sparked markets to price in a 14% chance the Fed will make a super-sized cut and chop the benchmark rate by 50 basis points to a range of 3.75% to 4%. As recently as last week, markets were pricing in a likelihood of a 25 basis-point cut, with an outside chance the Fed held rates steady.
“A Fed rate cut in next week’s September meeting is virtually guaranteed now (it was already very likely prior to today’s data),” Preston Caldwell, chief U.S. economist at Morningstar, wrote in a commentary.
So far this year, Fed officials have been pulled in two directions by their “dual mandate” to keep inflation low and employment high.
Inflation has been running above the central bank’s goal of a 2% annual rate, and President Donald Trump’s tariffs are expected to push it higher. At the same time, the job market has been losing steam, threatening the other side of the mandate.
The Fed can either keep rates high, which raises borrowing costs on all kinds of short-term loans, to fight inflation, or reduce the rate to push borrowing costs down and encourage hiring.
Until now, Fed officials have viewed inflation as the greater threat to the economy, and have kept the rate at a higher-than-usual level this year. The surprisingly bad jobs report, however, changes the equation.
“These employment data give the Fed all the reasons it needs to shift its balance of risks and lower rates in two weeks,” Jamie Cox, managing partner of Harris Financial Group, wrote in a commentary.
