Cooling Job Market Fuels Fed Pivot

At the Jackson Hole Economic Symposium on August 23, Federal Reserve Chair Jerome Powell signaled that a rate cut may be on the horizon – but emphasized that the timing will depend on incoming labor and inflation data. The Fed monitors both closely as part of its dual mandate: maintaining price stability and promoting maximum employment.

So, where do things stand now? Let’s break down the latest labor and inflation numbers – and what they could mean for the Fed’s next rate decision on September 17.

Labor Market: Signs of Slowing

Recent data shows clear signs that the job market is cooling off. According to the Bureau of Labor Statistics, just 22,000 jobs were added in August, far below expectations. ADP’s separate report showed only 54,000 private sector jobs, also a major miss.

Continuing unemployment claims have now been above 1.9 million for 16 consecutive weeks, indicating that more people are staying unemployed for longer periods. On top of that, initial unemployment claims hit a 4-year high while job openings have fallen to a 10-month low, another red flag for hiring activity.

Perhaps more concerning is the Quarterly Census of Employment and Wages, which revised job growth figures from the 12 months ending in March 2025 down by 911,000 jobs. That means previous monthly job gains were overstated by an average of 76,000 jobs – over half of the jobs initially reported never existed. This is the largest downward revision on record, suggesting the labor market has been weaker than it appeared for quite some time.

Consumer sentiment reflects this weakness as well. The New York Fed’s Consumer Expectations Survey for August showed that the perceived likelihood of finding a new job after losing one fell by nearly 6%, landing at just 45% - the lowest level since tracking began in 2013.

Inflation: Consistent With Forecasts

While job data has softened, inflation has remained mostly in line with estimates. In August, the Consumer Price Index (CPI) rose 0.4% month-over-month and 2.9% year-over-year, a modest increase from July’s annual rate of 2.7%. Core CPI, which strips out the more volatile food and energy categories, rose 0.3% month-over-month and held steady at 3.1% year-over-year. These numbers were broadly in line with what analysts had projected.

We also have insight from the core Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation measure. In July, core PCE rose 0.3% month-over-month and 2.9% year-over-year. While still above the central bank’s 2% target, the reading didn’t deliver any surprises and was largely consistent with market forecasts.

What’s Next for the Fed?

With the job market showing clear signs of weakness and inflation near expectations, the Fed appears poised to shift its focus from inflation control to supporting employment.

According to current market expectations:

• There is a 100% probability of a rate cut at the September 17 meeting (with a 91% chance of a 25-basis point cut and a 9% chance of a 50-point cut).
• Markets also see an 82.5% chance of another cut on October 29, and a 77.3% chance of an additional cut on December 10 – though these odds may change as more data becomes available.

Fed Governor Christopher Waller recently noted that when labor conditions weaken, the decline can happen quickly – underscoring the urgency to act. With that in mind, the Fed appears ready to begin easing monetary policy, shifting its focus more heavily toward the employment side of its mandate.

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By Shelly Williams