Why markets now expect a September Fed cut: cooling jobs, rising unemployment, and a cautious policy pivot

A fragile U.S. labor backdrop has pushed Wall Street to a clear conclusion: the Federal Reserve is likely to trim interest rates at its September 16–17 meeting. Friday’s jobs update, released just after the New York open, showed nonfarm payrolls up only 22,000 in August and the unemployment rate up to 4.3%. That combination—slow hiring and a higher jobless rate—reignited a “policy insurance” trade, with investors pricing a high probability of a 25-basis-point cut and assigning a non-trivial chance to a larger 50-bp step if officials choose to front-load support.
The mechanics are familiar. When the labor market cools, the Fed’s mandate forces a re-weighting toward employment stabilization, particularly if inflation is gliding lower and expectations remain anchored. Futures markets quickly reflected that shift: beyond September, contracts now sketch a path where the target range could be roughly a percentage point lower by January, either via a steady cadence of quarter-point moves or a bigger downshift followed by smaller steps. For equity and credit investors, the direct channel is the discount rate—lower policy expectations translate into easier financial conditions that bolster the present value of long-duration cash flows.
Under the surface, several details from the report sharpen the policy case. The share of long-term unemployed—those out of work for 27 weeks or more—has climbed above one quarter of total unemployment, a warning sign of potential scarring. Chair Jerome Powell has highlighted the asymmetry here: if layoffs pick up from unusually low levels while hiring stays soft, the jobless rate can rise quickly. That dynamic argues for an earlier, incremental cut rather than a delayed, larger rescue.
What could still shape the decision? Fresh inflation data due next week. A benign reading would remove the last obstacle to easing. Even if price measures come in mixed, the broader disinflation arc and fading wage pressure create space to maneuver without risking an inflation reacceleration. Communication will matter: a September move paired with data-dependent guidance for the remainder of 2025 would aim to balance labor support against inflation vigilance, preserving optionality into year-end.
Markets reacted accordingly in the opening stretch on Friday. Treasury yields slipped as the growth impulse softened, and rate-sensitive equities found support. Still, the path is not risk-free. If hiring weakens further or long-duration unemployment worsens, the soft-landing narrative could give way to concern about profits outside secular growth pockets. For now, though, the modal outcome investors are trading is a near-term Fed cut that cushions the labor market while keeping inflation progress on track—a pivot calibrated for a cooling economy rather than a crisis.