The weak job report from yesterday, which showed only 22,000 jobs added in August and an unemployment rate rising to 4.3%, has pushed consensus among analysts and financial markets that the Federal Reserve should and likely will cut interest rates at its next meeting later this month. Financial markets are now pricing a near-certainty (97–100% probability) of a rate cut at the Fed’s September 16–17 meeting. Most analysts expect a 0.25 percentage point cut, but the possibility of a larger 0.5 percentage point (“jumbo”) cut is increasingly discussed due to the labour market’s fragility.
It is reasonable to expect the stock market may struggle to go significantly higher after the rate cut, since much of the rally has already priced in expectations of monetary easing, and market participants are increasingly focused on underlying economic risks. Cutting rates carries several key risks for the markets, including concerns about inflation, doubts about economic fundamentals, potential market volatility, and diminished policy effectiveness if economic data continues to deteriorate. A rate cut, especially if implemented while tariffs and trade pressures persist, could reignite inflation just as consumer prices may already be rising due to external factors like tariffs or supply disruptions.
We could see bond yields rallying again as investors price in higher inflation. I think yields will rise if the Fed cuts rates in September, cutting rates when the economy is doing fine is bullish for inflation. We see lower job numbers but GDP is growing above average.