US Jobs Report Confirms Labor Market Cooling, Strengthens the Case for the Fed to Shift to Policy Loosening

Weakened dollar and shifting market expectations

The dollar weakened by around 0.4% immediately after the release, as markets priced in the prospect of faster and deeper monetary easing in the coming months. The move reflects a shift in expectations from cautious adjustment to potentially larger or more frequent cuts.

Skepticism had lingered over whether the softening in the labor market seen between May and July was merely temporary volatility driven by trade and immigration policy uncertainty. August’s lack of a rebound – coupled with a downward revision to June data showing the first monthly job loss since the 2020 pandemic – has now put those doubts to rest.

The Fed's Decision: 25bps vs. 50bps

The focus turns to the Fed: will officials opt for a standard 25bps move on September 17, or consider a bolder 50bps cut? While some policymakers have already flagged the latter, Chair Jerome Powell’s cautious messaging suggests consensus will be hard-won.

This report also comes amid political drama. Following President Trump’s dismissal of the Bureau of Labor Statistics chief last month, today’s weak data is likely to further frustrate the White House. Yet, it simultaneously strengthens the case for the rate cuts that the President has long demanded.

Next week’s August CPI release is the last major data point before the FOMC meets. But given today’s sharp labor market signal, only a major upside surprise in inflation is likely to alter the Fed’s trajectory.

Meanwhile, gold prices have surged again. With the Fed forced to prioritize employment over inflation management, investors are hedging against a prolonged overshoot of inflation by piling into hard assets to protect their wealth.