September Rate Cut Uncertain After Jobs Report Shock

Market expectations for the Federal Reserve’s next move went on a wild ride last week, whipsawing traders and sending bond ETFs higher.

At the start of the week, before the Fed’s July meeting, Fed funds futures were pricing in a 65% chance of a rate cut at the central bank’s next meeting in September. But by Wednesday afternoon, those odds had plunged to 45% after the Fed held rates steady and Chair Jerome Powell pushed back on the notion that a cut was guaranteed.

Powell reiterated the Fed would remain data-dependent, citing concerns about inflation—particularly those stemming from tariffs—and described the labor market as “solid.”

That view didn’t age well.

Friday, the Bureau of Labor Statistics reported that nonfarm payrolls increased by just 73,000 in July, below economists’ expectations for a 104,000 gain. More troubling were the sharp downward revisions to prior months: June job growth was slashed to a mere 14,000 from 147,000, while May’s total was cut to just 19,000 from 144,000.

Markets Take Notice 

In the wake of the report, Fed funds futures swung sharply again. By Friday afternoon, markets were pricing in an 80% chance of a rate cut at the September meeting, nearly double the odds from Wednesday afternoon.

Treasury yields also tumbled. The 2-year note yield fell 23 basis points, roughly the equivalent of a standard Fed rate cut. The 10-year dropped 14 basis points, and the 30-year declined 9 basis points.

That sparked a rally in bond exchange-traded funds. The iShares Core U.S. Aggregate Bond ETF (AGG) rose as yields fell, lifting its year-to-date gain to 4.4%. The iShares 20+ Year Treasury Bond ETF (TLT) also rallied, and is now up 2.8% on the year.

Still Not a Done Deal

Despite the dramatic repricing, a September rate cut isn’t certain. The Fed has made it clear it’s watching the data closely, and there’s more data to come.

Between now and the September meeting, the central bank will get one more jobs report (for August), along with inflation prints for July and August. Surprises would again shift the calculus.

It’s also worth noting that while Friday’s bond rally was sharp, yields have simply returned to where they were a few weeks ago, not to new lows. The 2-year yield bottomed at 3.7%, matching late June levels but still above the 3.6% low from April. The 10-year yield hit 4.2%, also in line with late June but above its 4% April low. The 30-year yield touched 4.8%, above both its June and April lows.

In other words, bonds are rallying, but not yet soaring. The Fed’s path remains uncertain, and so too does the future direction of interest rates.

Investors will anxiously watch to see what happens when the next round of data hits.