Weak non-farm payrolls ignite expectations for a 50 basis point rate cut. Is the Federal Reserve's rate cut script for 2024 about to unfold again?

According to the Zhitong Finance APP, after an unexpectedly weak U.S. non-farm payroll report highlighted the possibility of a significant slowdown in the U.S. economy, even a potential recession, some Wall Street investment institutions believe that the Federal Reserve indeed needs to accelerate its monetary easing pace, including an increased likelihood of a substantial 50 basis point rate cut this month. If the Federal Reserve chooses to restart the rate cut cycle with a 50 basis point easing at this month's FOMC monetary policy meeting, it would align with the rate cut script for 2024, and it is also possible that similar decisions will be made in the remaining two meetings of this year—specifically, a 25 basis point cut to continue the easing pace.

Before the non-farm payroll report was released on Friday, interest rate futures traders collectively bet that the Federal Reserve would lower its benchmark rate by a conventional 25 basis points at the monetary policy meeting on September 16-17, which they wagered would be the first rate cut in nine months and the beginning of the Fed's rate cut cycle.

Nick Timiraos, a reporter for The Wall Street Journal known as the "Fed's mouthpiece," stated after the non-farm data was released that employment growth had sharply slowed this summer, and the August non-farm payroll report clearly indicated that job growth in the U.S. had significantly cooled since the beginning of the year, making it almost certain that the Federal Reserve would cut rates by 25 basis points at its meeting in two weeks.

Following the extremely weak August non-farm data and the continued downward revisions of employment data from previous months, the "CME FedWatch Tool" indicated that the probability of a 25 basis point rate cut by the Fed in September had risen to 90%. Notably, the probability of a 50 basis point cut increased significantly from zero before the non-farm report to 10%. Federal Reserve Chairman Jerome Powell laid the groundwork for a September rate cut in his speech last month, pointing out significant risks in the U.S. labor market.

For the FOMC monetary policy meetings on October 29 and December 10, interest rate futures traders generally bet that the Federal Reserve would consecutively cut rates by 25 basis points, betting that the Fed would cumulatively cut rates by 100 basis points over the remaining three meetings in 2025, replicating the rate cut path of 2024.

The market seeks a more aggressive rate cut process after weak non-farm payroll data

The U.S. non-farm payroll growth in August was far weaker than expected, with the previously revised June job additions even showing negative growth. Following the release of the latest non-farm report, all three major U.S. stock indices fell, the dollar weakened, and U.S. Treasury yields declined across the board. Therefore, it is undeniable that as the data showed that the U.S. added only about 22,000 jobs in August, far below the market expectation of 75,000, and with June's employment data revised down to negative growth—marking the first monthly decline in employment numbers since 2020—the market began to price in the possibility of a larger half-percentage point rate cut, while now expecting more easing measures from the Federal Reserve by the end of 2025.

The U.S. labor market is sending the clearest signals of economic cooling to date. The August non-farm payroll growth fell far short of expectations, and the already weak job numbers for June and July were revised down by a total of 21,000 jobs, with the unemployment rate rising to 4.3%, the highest level since 2021. These data further solidified market expectations for a 25 basis point rate cut by the Federal Reserve in September and brought the option of a 50 basis point cut to the forefront "This is the second consecutive disappointing non-farm payroll report, which undoubtedly provides significant evidence for a slowdown in the U.S. economy," said Jack Ablin, founding partner and chief investment officer of Cresset Capital. "When you combine this with Federal Reserve Chairman Powell's tendency to lean more towards full employment rather than price stability, it indeed suggests that the Fed may take actions beyond what was originally planned."

The prospect of the Federal Reserve lowering interest rates has become increasingly clear, supporting the upward momentum of the U.S. stock market and global markets in recent weeks. However, after the non-farm payroll report was released on Friday, the U.S. stock market showed volatility. Following the data release, stock index futures initially surged but then reversed course. The benchmark index—the S&P 500—closed down 0.3% on Friday.

Bad news no longer equates to "good news"

The theory that "bad news is good news" has long been one of the core catalysts driving the rise in U.S. stock valuations and the repeated record highs of technology stocks—meaning that a worsening U.S. economy implies more aggressive rate cuts by the Fed, which in turn benefits risk assets like U.S. stocks. However, this theory showed significant cracks in Friday's lackluster market, as the U.S. stock market embraced the "classic framework" driving its rise—strong earnings and a resilient, steadily "soft landing" U.S. macro economy, rather than "bad news is good news."

"If investors focus on the Fed's policy rate cuts, that could support the stock market," said Jim Baird, chief investment officer at Plante Moran Financial Advisors. "However, if investors view it as a sign of further deterioration in labor conditions, large-scale unemployment, and a potential further slowdown or even recession in the U.S. economy, that would not be good news for the stock market."

International banking giant UBS recently warned that, based on "hard data" from May to July 2025, the risk of a recession in the U.S. economy is as high as 93%. UBS described the current situation as "stable but high risk," likening it to high blood pressure in medical terms—it may not collapse immediately, but it is dangerous. UBS has not formally predicted a recession but expects weak economic growth in 2025, with a potential recovery in 2026.

As concerns about a significant slowdown or even recession in the U.S. economy have intensified, investors have flocked to buy U.S. Treasury bonds, causing both short-term and long-term yields to decline. The 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," briefly fell to 4.06%, reaching its lowest level in five months. Meanwhile, in the foreign exchange market, expectations for accelerated rate cuts have pushed the U.S. dollar index close to a six-week low.

"We observe that G10 foreign exchange trading moves in tandem with nominal yields at the front end of the U.S. Treasury yield curve. That's why the dollar fell after the non-farm payrolls came in weaker than expected," said Benjamin Ford, a researcher at macro research and strategy firm Macro Hive According to LSEG statistics, as of Friday afternoon, the federal funds futures market has priced in a 10% probability of a 50 basis point rate cut later this month, with the remaining 90% probability leaning towards a 25 basis point cut.

Replicating the rate cut path of 2024?

Blair Shwedo, head of investment-grade sales and trading at US Bank, pointed out that when the Federal Reserve begins its rate cut cycle in September 2024, it starts with a half-point cut. "So I think the market is looking back at that situation and realizing that the Fed is not afraid to start with a more aggressive 50 basis point cut," Shwedo said.

Mark Malek, chief investment officer at Siebert Financial, stated that a 50 basis point move "would provide a tailwind for the stock market." "This would undoubtedly boost mega-cap growth stocks and signal investors to take on more risk," Malek said.

Slawomir Soroczynski, head of fixed income at Crown Agents Investment Management, indicated that a 50 basis point cut could lead to a "surrender" of short positions at the front end of the U.S. Treasury curve, which could exacerbate volatility in the bond market.

A more aggressive easing outlook could also heighten concerns about inflation. The current inflation rate remains above the Fed's 2% target, and Jerome Powell and other Fed officials have been wary of how tariffs from Donald Trump could lead to higher prices.

"What Powell is concerned about is that tariff uncertainty remains, and he knows that from an inflation perspective, an increase in risk appetite will certainly drive asset price inflation," said George Cipolloni, portfolio manager at Penn Mutual Asset Management. "So will tariffs and Fed policy drive consumer price inflation? That's where the tug-of-war lies."

Not everyone believes there will be a significant rate cut following the employment data. Phil Blancato, CEO of Ladenburg Thalmann Asset Management, stated that August is a "noisy month," and the actual data from August often gets revised upward.

There will be more data released before the September FOMC monetary policy meeting, especially next Thursday's August Consumer Price Index report (CPI), which will provide another reading on inflation trends. "Inflation remains a major issue and has not been significantly suppressed by expectations of slowing economic growth," said Melissa Brown, managing director of investment decision research at Simcorp