Introduction to the US Labour Market
The US labour market has been a topic of discussion lately, with the recent employment data released on September 5, 2025, causing concerns about a potential downturn. According to the Bureau of Labour Statistics, employers added 22,000 jobs in August, and the unemployment rate rose to 4.3 percent. This news has led to increased expectations that the Federal Reserve will lower interest rates in 2025.
Impact on Interest Rates
Investors are now fully pricing in a quarter-point rate cut at the Fed’s September 16-17 policy gathering. They also anticipate a total of three rate cuts in 2025, according to futures contracts. Some Fed watchers believe that the weak jobs data could lead to a larger-than-typical half-point cut in September, although inflation data due next week could influence this decision. Ms Diane Swonk, chief economist for KPMG, stated, "There’s no question they’re going to cut a quarter point. This underscores that the cracks in the labour market are getting wider, and that is problematic."
Reactions from Economists and Fed Officials
Economists at Barclays have revised their expectations, now predicting three rate cuts in 2025, compared to the two reductions they previously expected. Fed officials, including Jerome Powell and John Williams, have hinted at a coming rate cut. Mr George Catrambone, head of fixed income at DWS Americas, said, "The weakness in payroll data can no longer be ignored or chalked up as a one-off." However, some officials, such as Cleveland Fed president Beth Hammack and Kansas City’s Jeff Schmid, have expressed concerns about the risk of tariffs and other policies reigniting persistent price pressures.
Divergence of the Fed’s Mandates
The labour market is weakening, while inflation remains above the Fed’s 2 percent target. This divergence is a challenge for central bankers, but it is a situation they forecast a few months ago. In June, Fed officials released economic projections, forecasting climbing unemployment and inflation around 3 percent. They signalled that this would warrant two rate cuts in 2025, based on a median projection of 19 policymakers.
Potential for Future Rate Cuts
The Fed has changed since June, with two governors dissenting in favour of a cut at the July meeting. A new vacancy on the board and a fast-tracked confirmation process for a Trump-appointed replacement means there will be even more support for a faster pace of rate cuts. Mr Donald Trump’s pick to fill the vacancy, Mr Stephen Miran, is expected to push for a half-point cut if he is confirmed by the Senate in time for the September 16-17 gathering.
Conclusion
In conclusion, the recent employment data has led to increased expectations of interest rate cuts in 2025. While some Fed officials and economists believe that a quarter-point cut is likely, others think that a half-point cut may be necessary. The divergence of the Fed’s mandates, with a weakening labour market and above-target inflation, presents a challenge for central bankers. As the situation continues to evolve, it will be important to monitor the Fed’s actions and their impact on the US economy. The upcoming inflation data and the September 16-17 policy gathering will be crucial in determining the direction of interest rates in 2025.
