The jobs market is slowing: It’s time for the Fed to cut rates

Despite broad acceptance that at least some inflationary price pressures remain intact, most investors are assuming that the Fed will deliver a 0.25-percentage-point rate cut at the end of its decision-making meeting on September 17. It is expected to be the first in a series of downward adjustments, with markets expecting nearly 1.5 percentage points worth of cuts between now and the end of 2026.

Though inflation has been the dominant force driving the Fed’s policy stance for the past few years, we believe it is time for the central bank to focus on fulfilling the other half of its formal mandate: supporting the health of the labor market. With household consumption accounting for nearly 70% of total U.S. GDP, the stability of the jobs market is often characterized as the bedrock of the economy.

As we take stock of various indicators of employment conditions, we see a picture that suggests some support in the form of lower interest rates is indeed prudent. Like last year when the labor market showed signs of weakness, a few “insurance” interest rate cuts from the Fed could help keep the economic expansion alive.

With the Fed having kept its policy stance on pause all year, what underpins the confidence that September is the time to resume rate cuts? We see a handful of evidence pointing in that direction; it even creates an acrostic that spells out “CUT!”

Over the course of 2024, the U.S. saw an average of more than 160,000 payroll additions each month. Although the first half of 2025 showed continued resilience, more recent data suggests that hiring momentum has waned. The last three months of headline labor market data show average jobs growth of just +29,000 – excluding the pandemic-era economic freeze, that’s the slowest three-month average since the economy’s recovery from the Global Financial Crisis.

The Fed’s latest Beige Book publication – which aims to augment hard economic data with qualitative insights on trends playing out in the macro backdrop – revealed that the softening in payrolls data can be mostly attributed to a few themes: ongoing uncertainty related to policy changes like tariff hikes, slowing demand from consumers and businesses and a willingness to allow workforces to shrink via natural attrition (rather than having to initiate layoffs).

The latest report also showed the unemployment rate rising to 4.3%, which is just a tick above the Fed’s own estimate of where it could settle in a healthy, “normal” economy. The direction the unemployment rate is traveling, however, should prompt attention.

The good news? As hinted above, the rise in unemployment doesn’t seem to be stemming from a meaningful increase in firings. Initial filings for unemployment insurance (a weekly data release that serves as a decent proxy for firings) remain well contained and approximately in line with 2023 and 2024 levels.

Regardless, the Fed doesn’t want to see this indicator (or the unemployment rate) move sustainably higher before it starts taking action.

Much of economics is based on not just what’s happening with demand, but also supply. Amid a shift toward stricter immigration policy in 2025, labor supply has slowed. As Fed Chair Powell himself has pointed out, that offers a counterbalance to the slowdown in labor demand that can help keep the unemployment rate low. Some members of the FOMC, however, think that argument may be misguided.

Take Fed Governor Waller, for example: In a speech titled “Let’s Get On With It” at the end of August, he made the argument that this isn’t exactly a good reason for the unemployment rate to remain low. To use his words, “Whether or not supply is down, weakening demand is not good, and it is specifically what monetary policy is intended to address.”

We think the slowdown in labor market conditions is meaningful enough to get the Fed moving this month, and we still believe that the economic expansion will continue in the U.S. in the year ahead. From that perspective, it’s important to consider the full picture of how the economy is evolving.

For starters, we seem to be past peak tariff uncertainty – the higher levies could still pinch both corporate profit margins and consumer wallets with higher prices, but having a clearer sense of where they will settle matters for confidence and decision making. As the calendar turns to 2026, taxpayers may also start to capture some of the benefits of the One Big Beautiful Bill passed earlier in the summer, which could offer tailwinds. And, of course, lower interest rates tend to be supportive for the economy as a whole by lowering the cost of financing for activities like business expansions, home buying and more.

We’re ready to help investors adapt to the evolving environment. As a starting point, check out our latest Top Market Takeaways note covering The Fed Rate Cutting Playbook, and be sure to check back in with Quick Shot after the Fed’s decision.

All market and economic data as of 09/08/2025 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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