Pressure mounts on the Fed

With the US labour market softening, a cut of 25 bps looks in the bag this week, but pressure is mounting for more, even with inflation holding far above target.

15 September 2025

Investor optimism for a Federal Reserve (Fed) rate cut of at least 25 basis points (bps) surged late last week following a sharp drop in the University of Michigan’s consumer sentiment index, which fell to its lowest level in four months. This comes off the back of already-weakening labour market data in the form of a non-farm payrolls report which showed that just 22,000 jobs had been added to the US economy for the month of August (70-100,000 additions are typically needed to keep unemployment stable).

Other labour indicators chimed in with this. The ratio of job vacancies to unemployment has fallen from a post-pandemic high of two (ie two vacancies for each person looking for work) down to just below one now, nudging what some economists would formally define as a ‘loose’ labour market. As such, there is even a small but not insignificant possibility of a 50 bp interest rate cut. This of course would delight the Trump administration which has been agitating for a removal of current Fed Chair Powell to be replaced with a dove who would meaningfully cut rates, and fast. While it may look on paper as if politics and economics have coalesced around the prospect of lower rates, the Fed still faces the awkward challenge of stubbornly higher inflation. US consumer price index (CPI) inflation currently stands at 2.9%, nearly a full 1% above the Fed’s mandated target as tariff uncertainty affected prices of key goods like apparel and commodities like coffee at the last reading. The Fed of course will be hoping that this inflation just goes away but asset classes like gold and 10-year US Treasuries are suggesting anything but transience in expected US price rises.

US stockmarkets have recently welcomed the prospect of lower interest rates and, combined with a decent corporate earnings season (see Oracle), many analysts are pointing to a ‘melt-up’ in markets. But it’s worth keeping an eye on the minutes of the Federal Open Market Committee’s (FOMC) rate-setting meeting. Any hint that the committee remains worried about inflation even while cutting rates will be a continuing source of policy uncertainty markets will somehow have to reconcile if they are to keep making progress.

Loosening up - US labour market appears to unite White House and Fed on issue of lower rates:

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