• Traders now see a 75% chance of a 25-basis-point Fed rate cut in September, up from 45% before the jobs report.
  • The shift follows softer payrolls data and cooling labor market trends, giving the Fed room to ease policy.
  • Dissent within the FOMC and slowing GDP growth (1.2% QoQ) further support the case for cuts, though inflation remains above target at 2.7%.

Markets Reprice Fed Expectations

U.S. interest rate futures surged after the latest payrolls report, with traders now pricing in a 75% probability of a 25-basis-point rate cut at the Federal Reserve’s September meeting—a sharp increase from just 45% before the data release. The shift reflects growing confidence that softening employment figures and moderating economic growth will push the Fed toward accommodative policy sooner than previously expected.

At its July meeting, the Fed held rates steady at 4.25%-4.50%, but dissenting votes and a subtly softened policy statement hinted at mounting openness to cuts. "The jobs data was the final straw," said one trader familiar with derivatives positioning, who spoke on condition of anonymity. "The Fed’s hand isn’t forced yet, but the runway for easing is clearing."

Economic Backdrop

Recent GDP figures showed U.S. growth slowing to 1.2% quarter-over-quarter in early 2025, down from a 2.7% average in prior years. While inflation remains stubbornly above the Fed’s 2% target, June’s annualized reading of 2.7% marked a continued decline from post-pandemic highs. Chair Jerome Powell has cautioned that trade policy risks—including renewed tariffs—could complicate the outlook, but markets are increasingly betting on a dovish pivot.

Goldman Sachs and UBS analysts now forecast up to three cuts through late 2025, contingent on further economic softening. "September is live," a UBS strategist noted, though emphasized that incoming data will dictate the pace. For borrowers, a cut would bring relief to mortgage rates and corporate debt costs, while savers face thinner yields.

What’s Next?

All eyes turn to August’s inflation and employment reports, which could solidify or undermine the case for September action. With global central banks like the ECB also tilting dovish, the Fed’s next move carries weight beyond U.S. markets. Futures volatility is likely to persist—especially if the data surprises.