The case for a bigger rate cut is gaining momentum.
Nonfarm payrolls rose by just 22,000 last month, shooting far below expectations of 75,000. Revisions also erased gains from earlier in the summer, leaving June as the first month of outright job losses since 2020. The three-month average of payroll growth slowed to just 29,000, underscoring what EY-Parthenon’s Lydia Boussour called cracks “in the economy’s main pillar – the labor market.” The unemployment rate also ticked up to 4.3%, the highest since October 2021.
“A 50-basis-point cut is now in play,” analyst Jamie Cox of Harris Financial Group wrote in a note. “The Fed’s free pass on the labor market has ended.”
Others were even more cautious.
“I don’t view the current results as soft enough to warrant 50,” Larry Werther, chief U.S. economist at Daiwa Capital Markets, wrote in a note, citing lingering inflation pressures.
Joseph Brusuelas of RSM echoed that view, adding, “One will hear talk of a 50-basis-point cut, which we think is premature. It would take a large downside surprise in the producer price index and consumer price index for that to happen.”
Still, ING’s James Knightley said, “Some investors are questioning whether the Fed could cut by 50bp in September… We could see two or three [FOMC members] voting for 50bp.”
For now, most Wall Street economists still expect the Fed to cut by a quarter point on Sept. 17, followed by additional moves in December and into 2026. But markets are increasingly pricing in the chance of a larger “insurance cut” to halt what looks like an emerging downturn.
Meanwhile, the yield on the 10-year Treasury tumbled 9.2% basis points to 4.084% on expectations for more aggressive easing.
The symbolism of an emergency cut
“It’s a tightrope,” Brusuelas said. “The labor market is deteriorating, but inflation is not yet back to target. The Fed’s job is getting harder, not easier.”
The outcome may hinge on next week’s benchmark revisions to payroll data, which could show hundreds of thousands fewer jobs created over the past year than previously reported. If the labor market proves even weaker than the official data already suggests, the case for a bolder half-point cut in September will only grow louder.
