Markets are increasingly pricing in the chances of the Federal Reserve cutting interest rates at its next meeting in September following last week’s weaker-than-expected jobs report.
The Fed’s policymaking arm, the Federal Open Market Committee (FOMC), has opted against cutting interest rates at all five of its meetings this year, including last week’s, as stubborn inflation has remained higher than the central bank’s 2% target and tariffs pose the threat of pushing inflation higher.
Though inflation has yet to decline below that threshold, the market sees the Fed’s holding pattern coming to an end when the next interest rate announcement occurs on Sept. 17.
According to the CME FedWatch tool, the market now sees a 90.4% probability of the Fed cutting interest rates by 25-basis-points following its next meeting – up from 63.3% a week ago and 64% last month.
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The changes come after the FOMC held rates steady at its July meeting last week.
Federal Reserve Chair Jerome Powell said the labor market is “broadly in balance and consistent with maximum employment.”
He also noted that evidence suggests U.S. companies and consumers are paying most of the cost of tariffs, rather than foreign exporters lowering their prices to account for the tariffs.
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Powell said the central bank is well-positioned to respond to any deterioration in economic conditions, and the market took his comments to be relatively hawkish about inflation. Following the announcement, the chance of a September rate cut declined from 63.3% to 47.3% on Wednesday.
Last week also saw the release of the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) index, which showed headline PCE inflation rose on an annual basis to 2.6% in June, up from 2.3% in May. Core PCE inflation, which excludes volatile food and energy prices, also ticked higher from 2.7% to 2.8%.
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The market viewed that news as decreasing the likelihood of a September rate cut, as the probability of a cut declined from 46.7% to 39%, per the CME FedWatch tool following the news.
The July jobs report was released on Friday and came in at 73,000 jobs added – well below the 110,000 estimate of economists polled by LSEG. It also contained larger than normal revisions which left employment in May and June lower by 258,000 jobs.
The odds of a rate cut rallied following the weak jobs report, with the CME FedWatch tool showing a jump from 37.7% to 73.6% on the news.
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