BofA expects Fed to deliver two cuts this year after soft jobs report

The U.S. labor market significantly softened in August, adding a lower-than-expected 22,000 jobs and pushing the unemployment rate to a near four-year high of 4.3%. This data has prompted a notable shift in Wall Street expectations for Federal Reserve policy, with BofA Global Research now forecasting two 25 basis point rate cuts in September and December—a significant reversal from its prior no-cut stance—and other major brokerages like Morgan Stanley and Citigroup also anticipating immediate easing, strengthening the case for a September rate cut.

Analysis

The U.S. labor market demonstrated significant and unexpected weakness in August, with nonfarm payrolls increasing by only 22,000 and the unemployment rate rising to a near four-year high of 4.3%. This sharp deceleration has catalyzed a major shift in monetary policy expectations. Notably, BofA Global Research, previously the sole major Wall Street firm forecasting no rate cuts in the current year, has reversed its stance to now project two 25 basis point cuts in September and December, with an additional 75 basis points of easing in 2026. This pivot aligns BofA with other key institutions like Morgan Stanley and Citigroup, solidifying a dovish consensus that expects immediate Fed action. The rationale is twofold: the unambiguous softening of labor data and Fed Chair Powell's acknowledgment of rising labor market risks at the recent Jackson Hole symposium. While a 25 basis point cut in September is now the baseline expectation, Morgan Stanley notes that risks are tilted towards a more aggressive 75 basis points of total cuts by year-end, a possibility echoed by BofA's warning that a further significant weakening could prompt an earlier cut in October.

Key Decisions for Investors

• Given the dovish pivot from major analysts and the Fed, investors should assess increasing exposure to rate-sensitive assets, such as growth stocks and long-duration government bonds, which tend to outperform in a falling rate environment.
• Monitor upcoming inflation reports closely, as Fed Chair Powell's lingering concern over inflation represents the primary risk that could delay or reverse the widely anticipated rate-cutting cycle.
• Consider positioning for a potential economic slowdown by evaluating defensive sectors, as the sharp drop in job growth signals a cooling economy that could impact cyclical industries.
• Pay attention to the degree of further labor market deterioration, as a more rapid weakening could trigger more aggressive Fed cuts than currently priced in, creating opportunities in fixed income and related assets.