Why The Fed Might Cut Rates 50 Basis Points Next Week

Market Update

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The Federal Reserve policy decisions are data-driven. It has been hesitant to cut rates given the potential of higher tariff-driven inflation, resilient economic growth, and only a slowly softening labor market. Generally, the risks of higher inflation have been balanced by an easing in labor market conditions.  Given the balance of risks to the economy, The Fed sat – neither raising nor lowering rates.

This week’s data has likely changed The Fed’s perception of economic risks - just one week prior to the Federal Reserve’s Open Committee (FOMC) meeting. The Bureau of Labor Statistics (BLS) revised down by 911K jobs created from April 2024 through March 2025. That alone paints a much weaker picture of the labor market than implied by the unrevised data. Additionally, the August payroll employment report showed only 22K new jobs created during the month. Finally, today’s report on jobless claims soared to 263K – reinforcing the labor market weakness. Jobless claims climbed to 263K today, highlighting signs of a weakening labor market.

Further emphasizing weakness in the economy, the Federal Reserve’s Q2 credit report showed revolving credit (credit cards) increased at an annual rate of 9.7%. Keep in mind, reliance on credit card debt is an expensive, and temporary, solution to make ends meet. According to The Federal Reserve, the average APR on credit card debt is 21.2%.

Increased reliance on credit card debt can lead to high-interest rate charges that can compound struggling households’ ability to spend. Credit card and auto loan delinquencies have been on the rise. Presumably, this trend is most evident among the lowest income strata (population) - with the potential for this phenomenon to gradually embrace the middle-income strata. If that materializes, the outlook weakens for consumer spending which accounts for 70% of total US economic activity.

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On the inflation front, significantly higher tariff-induced inflation was expected to materialize in August. It did not. Consumer and producer price indices were relatively tame compared to expectations. This surprise signals that importers may be absorbing a greater portion of the tariffs than previously assumed. In addition, weakness in the economy may cause moderation in inflation. The potential strength of these deflationary spirits may signal a more severe decline in economic activity is underway.

These reports, particularly the revisions in the labor market strength, paint a dramatically different picture of the economy. The risks to the economy are no longer balanced. The threat of economic weakness is much greater than previously anticipated, and perhaps inflation is less of a threat. The new data that will likely push The Fed to cut rates next week – and perhaps more aggressively through the remainder of the year than previously expected. A 50-basis point (BP) cut in the federal funds rate is not off the table at next week’s FOMC meeting. If the Fed opts for only a 25 BP cut, the potential exists that a more aggressive Fed posture may show up at subsequent 2025 FOMC meetings.

The immediate impact of an aggressive September Federal Reserve policy pivot on construction activity is expected to be small due to the lag structure associated with monetary policy. However, larger impacts may materialize in 2026. Keep in mind, a recovery in private construction activity requires a reduction in interest rates AND relatively strong labor market conditions.

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