Investors seek Fed’s view of shaky labor market as rate cut looms

By Lewis Krauskopf

NEW YORK (Reuters) -Investors will look for the Federal Reserve to communicate how worried it is about the flagging U.S. labor market at its meeting next week and they expect the central bank to cut interest rates for the first time in nine months to shore up employment.

On Thursday, inflation data came in slightly hotter than expected. Still, market players did not expect this would dissuade the Fed from easing rates on Wednesday, following several downbeat reports about U.S. job growth.

More in doubt was the size of next week’s cut and how much the Fed expects to decrease rates in the coming months.

With some recent stability in trade and fiscal policy, “the Fed has moved back onto the front burner for investors going forward,” said Chris Fasciano, chief market strategist at Commonwealth Financial Network.

“Now that the labor market is weakening, the Fed becomes the dominant story for investors as to how they address that,” Fasciano said.

Expectations that the Fed will reduce interest rates have helped lift the major U.S. stock indexes to record highs, along with excitement over the potential of artificial intelligence, strong corporate earnings and calming fears about the economic fallout from President Donald Trump‘s tariffs. The benchmark S&P 500 is up 12% so far in 2025.

As of Thursday, Fed fund futures indicated that markets were expecting a 90% chance that the Fed lowers rates by 25 basis points in next Wednesday’s policy decision, according to LSEG data. The balance of expectations left about a 10% chance for a larger-than-standard 50 bp cut.

Of the 55 rate reductions in the fed funds rate since 1990, 60% of those have been 25 basis point cuts, according to Nicholas Colas, co-founder of DataTrek Research.

Of the 18 times the Fed has cut by 50 bps, all but one occurred during or just after recessions, Colas said in a research note. The one exception was in September 2024, which was the first of three cuts totaling 100 basis points last year, resulting in the current rate of 4.25%-4.5%.

“Based on this history, which both the Fed and markets know, a 50 basis point cut would signal that the (Fed) is worried about the near future of the U.S. economy,” Colas said in the note.

As it stands, Fed fund futures were baking in expectations of 73 basis points of easing by December or nearly three standard cuts. The central bank on Wednesday will give its latest summary of economic projections, updating its view of the economy and monetary policy.

As the Fed has held steady on rates so far in 2025, Chair Jerome Powell and other Fed officials have expressed wariness about Trump’s import tariffs possibly leading to higher inflation as a reason for forestalling rate cuts. Data on Thursday showed the consumer price index rose 2.9% on an annual basis in August, including the biggest monthly rise since January.