Markets Gain as Job Market Strains Push Fed Toward Rate Cuts

Weak jobs data has shifted the Fed’s focus from inflation to employment, making September rate cuts almost certain. Markets are rallying on expectations of easier policy, with tech and growth stocks leading gains. The outlook hinges on whether the Fed can engineer a soft landing without reigniting inflation.

Inflation Still Running Above Target

The latest combination of inflation and labor market data has made it almost certain that the Federal Reserve will begin cutting rates at its September meeting. August CPI showed headline inflation climbing to 2.9% year-over-year, while core inflation held at 3.1%. Month-over-month, prices rose 0.4%, a touch hotter than expected. Much of the stickiness reflects tariff-related pressures and rising energy costs, but the bigger story is the weakening labor market, which is forcing the Fed to shift its focus away from inflation.

Labor Market Cracks Widen

Recent revisions revealed that the U.S. added over 900,000 fewer jobs in the year through March than previously reported, with more than 1.2 million jobs effectively missing when subsequent adjustments are included. Payroll growth in the summer months has slowed to an average of just 29,000 per month, far below the pace needed to keep unemployment stable. Weekly jobless claims have now risen to 263,000, the highest in nearly four years, signaling that cracks in the jobs market are turning into broader structural weakness.

Fed Set to Begin Cutting Rates in September

Markets are pricing in almost a 100% chance of a 25 basis point cut next week, with a small possibility of a half-point reduction. While inflation remains above target, the Fed’s dual mandate obliges it to address growing risks to employment. Chair Jerome Powell is expected to emphasize that further cuts are likely in October and December, setting up a series of moves that could lower policy rates by 75 to 100 basis points by year-end.

Equities Surge on Policy Shift

Equities have responded forcefully. The Dow surged above 46,000 for the first time, the S&P 500 broke past 6,500, and the Nasdaq crossed 22,000, reflecting optimism that monetary easing will support valuations. Growth and technology stocks, most sensitive to falling discount rates, are leading the rally, while rate-sensitive sectors such as housing and utilities also stand to benefit. At the same time, consumer-driven sectors could face headwinds if job losses weigh further on household demand.

Outlook: Soft Landing or Fragile Balance?

By late 2025, the equity outlook appears cautiously optimistic. Should the Fed achieve a soft landing—easing policy to support jobs without sparking new inflation—record market highs could hold. Cheaper borrowing will improve financial conditions, spur corporate investment, and help support valuations. Still, volatility is expected to stay high around Fed decisions, tariff developments, and labor market reports.

Bottom Line

In short, the Fed’s pivot to rate cuts is now firmly underway. Inflation is still persistent, but mounting weakness in the labor market poses the bigger risk. The first step will be taken in September, with more easing likely to follow, and the equity market has already begun to price in this new cycle. By the close of 2025, whether stocks remain at record levels will depend not only on policy support but also on the Fed’s ability to balance growth risks against the lingering pressures of tariffs and prices.