Fed Watch – 9/5/2025

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hi, I’m Lauren Saidel-Baker. Welcome to this September 5th edition of Fed Watch.

It’s jobs Friday. The August jobs report came out this morning and it was not a disaster, but certainly a weaker result. Now you’re going to see some egregious headlines. Let’s cut down to what really matters in this jobs result. 22,000 increase in nonfarm payrolls, that is lower than consensus estimates, and that is on the weak end of what is normal for the month of August. So not abysmal, we’re still within the range of what happened, say, last year or even in 2023, but this is certainly a softer result.

More notably, we also saw some downward revisions. The biggest one, the headline that you’ll see, is the revisions revealed a net loss of 13,000 jobs in June. So this is certainly showing some weakening on the labor market side of the Fed’s dual mandate. For me, this essentially locks us into a rate cut in the September meeting. So the question now is whether that will be a cut of 50 basis points or of just 25. I’m personally in the camp that we’ll see a 25 basis point cut, but if we do see 50, if the Fed does go that far, please don’t take this as a signal that things have changed materially. We’re still generally on course. The outlook is still very much intact.

So if we break down that nonfarm payrolls result, we saw the biggest contributor was again the healthcare sector. And if you’ve been following us at ITR Economics, you’ll know that healthcare, it doesn’t move exactly cyclically to the rest of the macroeconomy. So seeing relative strength there, as we have for several quarters now, that really isn’t so telling about the health of the economy overall. In fact, we saw net declines in both wholesale trade and manufacturing in that August number.

So what does this mean for the balance of the labor market? Well, certainly employers are not out there hiring plentifully, but at the end of the day, while there was a slight tick up in the unemployment rate, we saw that rise to 4.3%, we still do see labor availability as being one of the major constraining factors in this labor market. Put quite simply, demographics are not helping us here with that labor availability, and in fact, this year we do expect to see negative net migration. That’s pulling some labor availability out of the equation, especially in key sectors. The two biggest risk factors remain agriculture and construction, but we could see some drawdown from things like retail, wholesale trade manufacturing, and those types of services as well.

So at the end of the day, where does this leave us? Well, the bond market did not react very strongly. We still are seeing, especially in that long end of things, the expectation is for inflation to be a persistent problem. So please don’t lose sight. With a big headline jobs number like this, don’t lose sight of that inflation side of their dual mandate. At the end of the day and later into 2025, we expect ramping pricing pressures to really limit the number of cuts that we’ll see. So some cuts certain to happen, again, even 50 basis points still on the table, if not the most likely outcome for September, but stick to the plan. This one month or even the past couple months of labor market data, this does not represent a material turning point. This does not mean that the inflation pressures we’ve been warning about won’t be there in the future.

So stick to the outlook, keep watching the bond market. And of course, stay with us here at ITR Economics. We’ll see you next week here on FedWatch.