Jobs report shocker resets Fed interest rate cut bets

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Jobs report shocker resets Fed interest rate cut bets originally appeared on TheStreet.
The Federal Reserve hasn't had an easy job in 2025. The central bank is governed by a dual mandate to set rates at levels that encourage low unemployment and inflation—two often contradictory goals.
When the Fed increases its Fed Funds Rate, it can lower inflation by slowing economic activity, which also causes job losses. When it cuts rates, economic activity picks up, reducing unemployment but increasing inflation.
Most want Fed Chairman Jerome Powell to cut rates this year, but doing so may fuel inflation further, given that tariffs may already be causing it to climb.
Consequently, deciding what to do with interest rates this year is particularly challenging, particularly after the latest jobs report showed serious cracks forming in the job market.
Jobs data causes major shift to Fed interest rate cut chances in September
The Fed watches the unemployment rate very closely because of the dual mandate. Last year, the fact that unemployment had climbed above 4% from 3.4% in 2023, while inflation retreated, allowed the Fed to cut interest rates by 1% before the year's end.
This year, the Fed has remained sidelined on rates, awaiting clarity into whether unemployment or inflation worsens.The first significant signs of job weakness may have emerged in July. According to the Bureau of Labor Statistics, the US economy created only 73,000 jobs. Wall Street economists expected 100,000 jobs, which would have still marked a retreat from May, when 147,000 jobs were created.
There were also significant downward revisions to jobs previously reported to have been created in June and May.
"Those revisions point to just 33,000 jobs created during those two months, far less than the 272,000 previously cited," wrote portfolio manager Chris Versace on TheStreet Pro.
As a result, the unemployment rate increased to 4.2% from 4.1% in May. More specifically, it climbed to 4.248%. That's concerning because it narrowly avoided being rounded to 4.3%, which would have marked the highest unemployment rate since 2021.
Since unemployment was higher than expected and is potentially nearing a cycle high, the CME FedWatch tool reported that bets for a Fed interest rate cut in September improved to 87% on August 1 from 38% on July 31.
The Fed risks falling behind the curve as officials disagree
The Fed held interest rates unchanged at a range of 4.25% to 4.50% on July 30, but not every voting member agreed.
Michelle W. Bowman, Vice Chair for Supervision, and Christopher J. Waller, a Fed Governor, dissented, favoring a quarter-percentage-point cut to rates. Additionally, absent and not voting at the meeting was Adriana D. Kugler.
Bowman said in a statement released August 1 that her dissent was based upon "increasing signs of fragility" in the labor market and tame inflation.
Waller echoed those sentiments in his statement, suggesting that rates are currently too restrictive, and a 3% Fed Funds Rate would be more appropriate.
A hesitancy to cut rates could result in the Fed falling behind the curve, requiring it to make more extreme rate cuts in the future. These cuts could prove more dangerous to inflation than more measured cuts this year.
Tariff inflation impact keeps Fed on hold
Bowman and Waller's opinion isn't shared by Fed Chair Powell, who struck a hawkish tone on monetary policy during his post-decision press conference this week.
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Powell reiterated that inflation remains above the Fed's 2% target rate and, while acknowledging that the impact of tariffs on inflation may be transitory, urged caution given that the US economy seemingly appears still on solid ground.
The Fed's preferred inflation measure is the core Personal Consumption Expenditures Index, or PCE, which excludes volatile energy and food. PCE showed core inflation of 2.8% in June, up from 2.6% in April.
Powell may also have a point regarding economic activity being in a good place, given the advance estimate placed gross domestic product, or GDP, at 3%, reversing a 0.5% contraction in the first quarter, and matching the level reported in the second quarter of 2024.
Another reason supporting patience is that President Trump's pause on reciprocal tariffs ended on August 1, resulting in a slate of new tariffs that could increase inflation. The President's newly set tariffs range from 10% to 41%, including a 35% tariff on Canada.
What this means for American consumers
The Fed Funds Rate is the rate banks charge each other on overnight loans. If the Fed cuts rates in September, consumers should see a drop in borrowing rates, including credit card, auto loan, and mortgage rates.
Mortgage rate relief would be particularly welcome, given that rising home prices and higher mortgage rates have discouraged many would-be home buyers.
Banks typically set mortgage rates at 2% to 3% above the 10-year Treasury note yield.
After the unemployment rate update, the 10-year Treasury yield slipped to 4.22%, its lowest level since April 30, when it was 4.17%.Jobs report shocker resets Fed interest rate cut bets first appeared on TheStreet on Aug 2, 2025
This story was originally reported by TheStreet on Aug 2, 2025, where it first appeared.