Chances of 50bp fed cut emerge after weak jobs report

Investing.com -- Following today’s weak August jobs report, traders are fully pricing in a Fed rate cut in September, with rising speculation that a larger move could be on the table.

According to Investing.com’s Fed Rate Monitor Tool, based on CME Group 30-Day Fed Funds futures, markets now assign a 92.4% probability of a 25-basis-point cut at the September 17 meeting and a 7.6% chance of a 50-basis-point cut. Just a day earlier, those odds stood at 98.4% and 0%, respectively.

The shift comes after the Labor Department reported the economy added only 22,000 jobs in August, well below economists’ expectations of 75,000. In addition, the prior two months were revised lower by 21,000. The unemployment rate also ticked up to 4.3% from 4.2%, the highest since 2021.

While markets see a cut as a near certainty, sticky inflation complicates the case. Still, Fed Chair Jerome Powell has already signaled openness to easing. At Jackson Hole last month, he said that “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” Today’s weak jobs data gives Powell and other holdouts political and economic cover to align with colleagues who have been pushing for a cut.

Overall, economists are fully convinced that the Fed will move in September, although a 50 basis point cut would appear too high a hurdle.

“We do not see the report as weak enough to justify a 50bp rate cut in September, but it opens the door to rate cuts at consecutive meetings,” Morgan Stanley Chief U.S. Economist, Michael Gapen, said following the report. They expect 25bps cuts in September and December, although the weak jobs data could prompt the Fed to cut in consecutive meetings, potentially in September and October.

“We’re changing our call from cuts in October and December this year, we’re now expecting cuts in September and October,” CIBC economist Ali Jaffery said. “We are keeping our terminal rate view unchanged at 3.5%, being reached around the middle of next year, so we are shifting the timing of the start of the easing cycle, but keeping the total amount of easing unchanged at 100bps.”

“These are signs that labor demand is also weakening, not just supply,” BoA Securities U.S. Economist Shruti Mishra stated. “Hence, we now expect the Fed to cut by 25bp in Sep and Dec.”

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