U.S. Labor Market Slows, Federal Reserve Faces Pressure to Cut Rates

WASHINGTON, D.C. — The August 2025 nonfarm payrolls report highlights a slowdown in the U.S. labor market amid tariffs, persistent inflation, and an uncertain economic outlook. Employers added just 22,000 jobs this month, according to the Bureau of Labor Statistics. This figure falls significantly short of economists’ expectations of 110,000 jobs, based on FactSet’s consensus estimates, and is a sharp decline from the 79,000 jobs added in July.

The unemployment rate increased to 4.3% from 4.2%. ‘The trend of softening employment data continues,’ said Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth. This data comes as the Federal Reserve has maintained steady interest rates while awaiting improvements in inflation.

Market analysts believe declining labor market conditions bolster the argument for a rate cut in September. Even as inflation remains above the Fed’s 2% target, a weak job market may prompt significant monetary easing. ‘If this rate of growth persists, it will mark a significantly weaker-than-normal job market,’ stated Preston Caldwell, Morningstar’s senior U.S. economist.

August’s job growth has been uneven, with gains in healthcare being overshadowed by losses in federal government, mining, and energy jobs. Healthcare has added 549,000 jobs in the past six months, while the private sector lost 145,000 positions, and the public sector saw a reduction of 19,000 jobs.

Pappalardo noted that federal government employment has decreased by approximately 100,000 positions this year, as cuts initiated during the Trump administration continue to impact the workforce. Average hourly earnings have risen 3.6% over the past three months, which is lower than the 4.0% rise observed in 2024, suggesting a softening labor market.

Following this labor data, expectations for interest rate cuts from the Federal Reserve surged. ‘A Fed rate cut in September’s meeting is virtually guaranteed now,’ Caldwell remarked. Futures traders now predict a 65% chance of a 0.75 percentage point cut by December, a sharp increase from 46% just days earlier.

BofA Global Research forecasted two 25 basis point cuts in September and December, moving away from their earlier prediction of no cuts this year. They emphasized that if the labor market deteriorates further, the Fed might need to consider cutting rates in October or more aggressively next year.