Fed Hints at Interest Rate Cuts Beyond Two in 2025 Amid Cooling Job Market

San Francisco Federal Reserve President Mary Daly’s latest remarks underscore a pivotal shift in monetary policy thinking, suggesting that interest rate reductions could arrive sooner and in greater numbers than previously anticipated. This evolving stance reflects mounting evidence of a cooling U.S. labour market alongside stabilising inflation, potentially reshaping investor expectations for the remainder of 2025 and beyond. As policymakers grapple with balancing economic risks, such signals hint at a more aggressive recalibration to avert deeper slowdowns, with implications rippling across asset classes and borrowing costs.

Decoding the Push for Deeper Cuts

The indication that rate cuts may exceed the baseline of two this year points to a Fed increasingly attuned to downside risks in employment data. Recent labour market indicators, including a softening in job gains and rising unemployment claims, appear to be tipping the scales toward preemptive action. For context, the U.S. added just 114,000 nonfarm payrolls in July 2025, well below consensus estimates of 175,000. This shortfall, coupled with upward revisions to the unemployment rate to 4.3%, amplifies concerns that high borrowing costs are now biting harder than intended, prompting calls for relief beyond the minimal adjustments outlined in earlier Fed projections.

Historically, the Fed has leaned on gradualism during easing cycles, but Daly’s comments evoke memories of more decisive moves, such as the three rate cuts in 2019 amid trade tensions and slowing growth. If the current trajectory holds, a scenario with three or more reductions could mirror that period, where the federal funds rate dropped from 2.5% to 1.75% over several months. Analysts at Goldman Sachs have adjusted their models to price in a 50-basis-point cut as early as September, citing similar labour market frailties. This forward-looking view aligns with the notion that waiting too long risks entrenching weakness, a lesson drawn from the delayed response in the 2008 financial crisis.

Market Ripples and Asset Repricing

Equity markets, already jittery from recent volatility, could find solace in the prospect of amplified easing, though not without caveats. Lower rates typically bolster stock valuations by reducing discount rates in earnings models, yet the underlying driver—economic softening—introduces a double-edged sword. The S&P 500, down approximately 5% from its mid-July peak as of 4 August 2025, reflects this tension, with sectors like technology and consumer discretionary bearing the brunt amid fears of reduced spending. If Daly’s hints materialise into policy, it might cap further downside, but only if inflation remains contained; otherwise, a stagflationary whiff could unsettle investors anew.

Bond markets offer a clearer barometer of these expectations. Yields on the 10-year U.S. Treasury note have compressed to around 3.7% as of 4 August 2025, down from 4.2% just weeks prior, baking in heightened odds of multiple cuts. Fixed-income strategists at BlackRock suggest this repricing anticipates not just two but potentially three or four adjustments by year-end, depending on incoming data. Such a path would erode the appeal of cash equivalents, pushing capital toward longer-duration assets and possibly igniting a rally in corporate debt, where spreads have widened modestly amid uncertainty.

Economic Indicators in the Crosshairs

Inflation’s trajectory remains the linchpin for any expanded easing. The personal consumption expenditures price index, the Fed’s preferred gauge, eased to 2.5% year-over-year in June 2025, edging closer to the 2% target but still above it. Daly’s remarks imply confidence that this downtrend will persist, allowing room for bolder moves without reigniting price pressures. Yet, external factors like potential tariff hikes under a new administration could complicate this calculus, as noted in some economic analysis, where muted tariff impacts were initially downplayed but now warrant scrutiny.

Sentiment among professional investors, as gauged by a recent survey of economists, leans dovish, with 65% expecting at least two cuts by December and a growing minority forecasting three. This marks a shift from June polls, where one cut dominated projections, highlighting how quickly narratives can pivot on fresh data. Model-based forecasts from the CME FedWatch Tool assign a 70% probability to a 25-basis-point cut in September, with implied odds for a larger move climbing to 30%, underscoring the market’s digestion of these signals.

Risks of Overreach and Policy Tightrope

While the allure of more cuts promises short-term relief, it carries hazards of overstimulating an economy still grappling with post-pandemic distortions. A too-rapid descent could fuel asset bubbles, reminiscent of the low-rate environment that preceded the 2022 inflation surge. Daly’s phrasing suggests a data-dependent approach, yet the mere mention of exceeding two cuts injects a layer of uncertainty. Markets abhor ambiguity, and any reversal could spark volatility akin to the 2013 taper tantrum.

Comparatively, trailing Fed actions provide a roadmap: in the 2001 easing cycle, rates fell from 6.5% to 1.75% over 11 cuts, averting a deeper recession but sowing seeds for housing excesses. Today’s starting point, with the funds rate at 5.25-5.5%, offers ample room for manoeuvre, but the bar for “more than two” implies a recognition that two might not suffice if labour deterioration accelerates. Investors would do well to monitor upcoming releases, such as the August jobs report, which could cement or upend this narrative.

Investor Strategies Amid Shifting Winds

For portfolio managers, this signal warrants a tactical pivot toward rate-sensitive holdings. Real estate investment trusts, hammered by high borrowing costs, stand to benefit from lower rates, with some benchmarks rising in the sessions following similar Fed rhetoric. Conversely, financials might lag if net interest margins compress further. Diversification into emerging markets could also gain traction, as a softer dollar enhances their appeal.

In sum, the emphasis on nearing cuts, potentially surpassing initial plans, positions 2025 as a year of policy agility. While it alleviates immediate pressures, it demands vigilance against unintended consequences, ensuring that today’s dovish tilt doesn’t become tomorrow’s regret.

This analysis expands on implications from an X post by Evan dated 2025-03-28, reflecting broader Fed commentary as of 4 August 2025.

References

AINvest. (2025, August). BlackRock Signals 50-Point Fed Rate Cut September 2025. Retrieved from https://ainvest.com/news/blackrock-signals-50-point-fed-rate-cut-september-2025-2508

Bloomberg. (2025, July 10). Fed’s Daly Sees Two Cuts in 2025, Tariff Price Hit May Be Muted. Retrieved from https://www.bloomberg.com/news/articles/2025-07-10/fed-s-daly-sees-two-cuts-in-2025-tariff-price-hit-may-be-muted

Bureau of Labor Statistics. (2025, August 2). The Employment Situation — July 2025. (Data referenced in article text).

CME Group. (2025, August 4). CME FedWatch Tool. (Data referenced in article text).

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