Key takeaways
- July’s jobs data showed a substantial weakening in the labor market, prompting a dramatic repricing of expectations for Fed rate cuts.
- A cooling labor market challenges the Fed’s “wait and see” stance.
- The bond market now sees roughly 80% odds of a rate cut in September, up from 40% a day earlier.
Expectations for Federal Reserve interest rate cuts climbed sharply on Friday after an unexpectedly weak jobs report. The Bureau of Labor Statistics reported that the US economy added just 73,000 jobs in July, significantly fewer than economists expected. The release also had large downward revisions to job growth in May and June.
It was confirmation for markets that the US job market is cooling. Until now, analysts have maintained that a stable employment picture meant the Fed could hold rates steady while it awaited progress on inflation, which has been falling slowly but now faces upward pressure thanks to President Donald Trump’s new tariffs. Now the picture may be changing.
“Today’s report may be one of the first pieces of data that shows the negative impact of tariffs,” says Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth. “The large revisions in May and June align with the impact of the implementation of some of the Liberation Day tariffs and certainly may reflect the changes in business and consumer activities that have been feared since April.”
Before Friday’s jobs data, bond futures traders saw roughly 40% odds that the central bank would reduce rates in September. Those odds jumped above 80% on Friday morning, according to data from the CME FedWatch Tool. “This represents a meaningful shift in expectations,” Pappalardo says.
The US Fed’s Tough Spot
Friday’s employment data came on the heels of the central bank’s July meeting, where members of the Federal Open Market Committee voted to keep interest rates unchanged in their range of 4.25%-4.50%, where they’ve been since December.
“We believe that the current stance of monetary policy leaves us well positioned to respond in a timely way to potential economic developments,” Fed Chair Jerome Powell said in prepared remarks following the meeting. Powell pointed to elevated inflation risks around tariffs and noted that the unemployment rate remains low.
But the decision wasn’t unanimous; two Fed governors dissented in favor of a rate cut. One of them, Christopher Waller, has said risks to the labor market have increased. Dissenting votes are rare in the FOMC. This was the first time two board members dissented since 1993.
“This print is just one number in a week filled with important economic data releases, but the miss directly challenges the Fed’s hawkish posture from this week’s FOMC meeting,” says Alexandra Wilson-Elizondo, global co-CIO of multi-asset solutions at Goldman Sachs Asset Management.
Looking Ahead
In the longer run, CME FedWatch data shows that futures markets see a 64% chance of two rate cuts and a roughly 20% chance of three rate cuts by the end of the year.
Morningstar’s Pappalardo urges investors to take those longer-term odds with a grain of salt. “While futures can be a useful tool, it’s worth noting that the Fed has a much higher threshold for moving rates than market participants often expect,” he explains. “The probability of rate cuts has continued to move around quite a bit over the course of 2025, as economic data has held up quite well despite all the uncertainty around tariff and trade policy, geopolitical unrest, and heightened volatility in financial markets. Time will tell if this jobs report represents an inflection in the strength of the data.”
