By: Brent Schutte, Northwestern Mutual
There’s no crystal ball when it comes to predicting the Federal Reserve’s next move. Yet financial markets are currently pricing in a 100 percent chance that the U.S. central bank will slash interest rates at its next meeting on September 17. The reason for such definitiveness? A fresh batch of notably weak jobs data, leading investors to double down on bets that the Fed could lower its benchmark by as much as 50 basis points.
The latest nonfarm payroll report from the Bureau of Labor Statistics (BLS), which we’ll detail later in the commentary, showed hiring in August came in well below Wall Street estimates, marking a slowdown from July’s 79,000 increase, which was revised up by 6,000. Meanwhile, the unemployment rate rose to 4.3 percent.
The data also provided clues to another big question on investors’ minds: Will President Donald Trump’s sweeping levies against key U.S. trading partners cause rising inflation, slowing growth and a cooling labor market, or both? The latest insights reaffirmed what we and Federal Reserve Chair Jerome Powell have been forecasting for weeks now: “The balance of risks appears to be shifting” toward the labor market, to quote Powell at last month’s Jackson Hole Economic Symposium. While lingering inflation remains a major concern, a softening jobs market may be the most pressing risk when it comes to the long-term impacts of tariffs as the Fed teeters between its dual mandate of stable prices and maximum employment.
Judging by Wall Street’s reaction to the latest jobs data, the U.S. central bank’s balancing act may already be in jeopardy. Stocks retreated on Friday amid fears that the Fed is falling behind in its mission to prevent jobs weakening at a time when inflation is exhibiting signs of increasing stickiness. The S&P 500 shaved off 0.3 percent, and the Dow Jones Industrial Average fell 0.5 percent, while the tech-heavy Nasdaq 100 remained little changed. The employment jitters meanwhile ignited a rally in Treasurys, sending the 10-year yield down seven basis points to 4.07 percent and the two-year yield down six basis points to 3.51percent, nearing its lowest level since 2022.
All signs point to lower interest rates on the horizon as the Fed looks to counter the cooling jobs market—which could weigh on company earnings in the near term but with potentially lower borrowing costs in the future that could create a more favorable environment for broad equity markets in the intermediate term. We note that since the first weak jobs report on August 1, interest rate-sensitive U.S. Small and Mid Caps have outperformed their Large-Cap peers as the 10-year Treasury has fallen from 4.37 percent to 4.07 percent to end this week. However, history shows us that Fed rate cuts aren’t always the immediate magical cure for labor market weakness that some investors might hope. The U.S. central bank has opted to cut rates ahead of the last four economic contractions on record. Low consumer and business confidence, inflation concerns, economic uncertainty, and even technological changes—such as the rise of generative and agentic artificial intelligence—are all factors that can weigh on the labor market.
As we said before, there is no way to see directly into the future—especially in a market that has been subject to unpredictable swings with each new tariff announcement, trade spat or global conflict. Instead, we remain focused on diversification to prepare for all possibilities, wherever the economy takes us next.
About the Author:
Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.
