Fed seen on track for three rate cuts this year, starting next week

Revised U.S. labor market data, indicating 911,000 fewer jobs created over the past year than previously estimated, is solidifying expectations for the Federal Reserve to resume rate cuts. Traders are overwhelmingly betting on a 25 basis point reduction next week and another in October, with a third cut still largely priced in for December. This comes as the Fed balances a cooling job market against persistent inflation above its 2% target and potential price pressures from tariff policies, despite upcoming inflation reports expected to show ongoing upward trends.

Analysis

A significant downward revision in U.S. labor market data is solidifying expectations for a more dovish Federal Reserve policy in the near term. The preliminary finding that the economy created 911,000 fewer jobs in the year through March than previously reported suggests that underlying labor market strength was considerably weaker than perceived, with implied monthly gains of less than half the 147,000 initially stated. Consequently, interest rate markets are now overwhelmingly pricing in a quarter-point rate reduction from the current 4.25%-4.50% range at the upcoming September meeting, with high probability of a subsequent cut in October. However, this policy pivot is not without constraint. The Fed remains cautious, balancing these clear signs of a cooling labor market against inflation that persists above the 2% target and potential upside price pressures from tariff policies. While traders have slightly pared back bets on the extent of easing into 2026, the central bank's immediate path appears set, pending critical inflation data expected later this week.

Key Decisions for Investors

• Consider positioning for a more dovish Federal Reserve in the short term, as weakening labor data has strongly anchored market expectations for rate cuts in both September and October.
• Investors should closely monitor upcoming inflation reports, as any unexpectedly high readings could challenge the market's conviction for a third rate cut in December and introduce policy-driven volatility.
• While near-term cuts appear probable, maintain a degree of caution on the longer-term easing path, as traders have already pared back bets for 2026, reflecting underlying uncertainty tied to inflation and tariff risks.