Weak US labour market data has handed investors the excuse they needed to double down on their favourite bet: the Fed is about to start cutting rates. Never mind that inflation is still north of target and tariffs are busy stoking price pressures — the market has already priced in a quarter-point cut at the 16–17 September FOMC meeting, with three cuts in total pencilled in for 2025.
August’s job report was dismal: just 22,000 new payrolls and unemployment up to 4.3%. Revised figures showed wages actually shrank in June — the first dip since the Covid recession. Hardly a ringing endorsement of the so-called “resilient” US economy. Barclays promptly shifted its forecast from two to three cuts this year, while some Fed-watchers are even whispering about a half-point slash in September, should next week’s inflation numbers play along.
The Fed’s dilemma is the stuff of central bankers’ nightmares: a labour market cracking under pressure, even as inflation stubbornly clings above 2%. Powell, speaking at Jackson Hole in August, delicately hinted that the balance of risks was tilting towards unemployment. New York Fed chief John Williams followed suit, saying cuts would be “appropriate over time.” Translation: brace for easier money, but don’t expect miracles.
Of course, not everyone’s buying it. Cleveland Fed president Beth Hammack and Kansas City’s Jeff Schmid still fret that tariffs and fiscal gimmickry will reignite inflation. Chicago’s Austan Goolsbee struck a more cautious note, waiting for next week’s CPI before making up his mind. “The more benign inflation we see, the more comfortable I’ll be focusing solely on jobs,” he said — a statement so obvious it barely counts as analysis.
Into this muddle steps Stephen Miran, Trump’s latest pick for the Fed board, whose confirmation is being fast-tracked through the Senate. If he makes it in time, the White House will have a louder voice in September’s meeting, one firmly in favour of a 50bp cut. Independence, meet partisan arithmetic.
The irony is delicious. Markets want cuts, Trump wants cuts, Powell is hinting at cuts — but the Fed’s dual mandate is pulling in opposite directions. Inflation remains sticky, unemployment is rising, and policy credibility is eroding.
Yet multiply them, they may. The job report has handed doves their ammunition, and political pressure is turning the Fed into little more than a pawn in Trump’s economic theatre. Investors are already dreaming of sequential 25bp cuts per meeting, rather than quarterly.
Whether this proves to be sound monetary policy or just another chapter in Washington’s short-termist pageantry, one thing is clear: the Fed is no longer steering the markets. The markets, fuelled by weak payrolls and political noise, are steering the Fed.