Weak US jobs report paves way for Fed to cut interest rates

Economists believe central bank will shift focus to protect labour market after disappointing summer

Fed chairman Jerome Powell signalled last month that he was prepared to resume rate cuts. Reuters

A weaker-than-expected jobs report on Friday underlined concerns over the strength of the US labour market, clearing the way for the Federal Reserve to cut interest rates later this month.

Total nonfarm payroll employment rose 22,000 in August, according to data from the Bureau of Labour Statistics (BLS). Economists polled by FactSet estimated US employers added 80,000 jobs in August.

Meanwhile, the unemployment rate edged up to 4.3 per cent, slightly higher than the FactSet estimate of 4.2 per cent.

Friday's report showed a notable slowdown from July's revised increase of 79,000 jobs. Revisions also showed a net loss of 13,000 jobs for June.

Friday's jobs report was expected to have major implications for the Fed's next rate-setting meeting due to take place later in September, where the US central bank is likely to cut interest rates.

Most central banks in the Gulf Co-operation Council, whose currencies are tied to the US dollar, would be likely to mirror the Fed's decision.

Unlike other central banks, the Fed has a dual mandate of price stability and maximum employment. The August jobs report has now sealed the idea that the Fed will shift its attention to the labour market while officials anticipate tariff-induced inflation will lead to a one-time price increase.

"Faced with such a dilemma, we believe the [Federal Open Market Committee] will put more weight on rescuing the labor market and hope that tariff-induced inflation will fade in 2026," a Wells Fargo economics team led by Sarah House wrote to clients.

The report capped a disappointing summer for the labour market, which first flashed warning signals in a July jobs report whose revisions erased more than 250,000 job gains previously estimated. That report also prompted President Donald Trump to sack the Bureau of Labour Statistics chief Erika McEntarfer, sparking concern over the credibility of future data.

Kevin Hassett, a top economic adviser to Mr Trump, said he was baffled by August's low job numbers and suggested new data would somehow be more favourable.

"Right now, we’re puzzled about the BLS numbers, and looking forward for new leadership there to make it so that the numbers are more reliable," he told reporters.

Separate data this week only reinforced the idea of a labour market that has hit stall speed.

Labour Department data on Thursday showed there were an estimated 7.18 million job openings at the end of July, the first time since April 2021 that job openings fell below the number of unemployed workers. Data from processing firm ADP on Thursday also showed that private-sector hiring in the US increased by 54,000 in August, well below its revised gain of 106,000 in July.

"The weakening picture of the labour market painted by the August jobs data along with other recent labour market statistics all but ensure a rate cut at the FOMC meeting later this month," Nancy Vanden Houten, lead US economist at Oxford Economics, wrote.

Traders have overwhelmingly priced in a 25 basis point cut on September 17, while a minority anticipate a larger cut of 50 basis points, according to CME Group data.

Wells Fargo economists anticipate the Fed will cut rates at its final three meetings beginning this month, while Bank of America forecasted two cuts following the soft jobs report.

Fed Chair Jerome Powell signalled last month that he was prepared to resume rate cuts after holding policy steady around 4.33 per cent this year.

In his high-profile speech at the Jackson Hole economic policy symposium in August, Mr Powell suggested that changing economic conditions – namely in the labour market – “may warrant adjusting our policy stance”.

Fed's Jerome Powell leaves door open for US interest rate cuts

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Fed governor Christopher Waller, who dissented against the Fed's decision to hold rates steady at roughly 4.3 per cent in July, said recent data only reinforced his belief they need to lower rates.

"Let's get on with it," he said in prepared remarks at the Economic Club of Miami.

And New York Fed president John Williams, who holds a permanent vote on the FOMC, noted in remarks on Thursday that concerns "around the employment mandate a little higher, and on the margin, on the inflation mandate, a little bit lower".