Global Fixed Income Strategy - September 2025

Global macro strategy
 

Powell shifts tone at Jackson Hole

Federal Reserve Chair Jay Powell’s Jackson Hole speech in August opened the door to potential rate cuts at the Fed’s next meeting in September. His tone marked a clear shift from his July press conference, when he had adopted a “wait and see” approach.

The catalyst was labor market data. After recent revisions, the three-month average for job creation fell sharply to just 35,000 jobs. Downward revisions to prior months painted an even weaker picture of labor market momentum.

In Jackson Hole, Powell argued that the labor market remains broadly stable, citing the unemployment rate and other indicators. He noted that reduced immigration is limiting labor supply, while demand for labor is also softening—making it harder to gauge the overall balance.

Still, Powell acknowledged that risks to employment are rising. He warned that if these downside risks materialize, labor market deterioration could accelerate quickly—history has shown that such shifts can be non-linear. Given this shifting balance of risks, Powell suggested that policy recalibration may soon be warranted: “the shifting balance of risks may warrant adjusting our policy.”¹

FOMC divisions: Inflation hawks vs. labor doves

There is a healthy debate within the Federal Open Market Committee (FOMC), with some participants more concerned about inflation and less focused on labor market softness. For example, Cleveland Fed President Beth Hammack opposes a September rate cut, citing rising inflation and a stable labor market, warning that easing now could worsen price pressures—especially if businesses pass on higher tariff-related costs.

There is also an evolving discussion around labor market dynamics. Both Chair Powell and Chicago Fed President Austan Goolsbee have noted that demand and supply factors are shaping labor outcomes, with reduced immigration potentially weighing on job creation. Goolsbee has urged focusing on labor market ratios rather than headline job gains—a point Powell echoed at Jackson Hole.

Indicators such as quits, layoffs, vacancy duration, the job openings-to-unemployment ratio, and nominal wage growth may offer a clearer view of labor market health than monthly job creation alone. On these measures, the jury is still out—it is not yet clear how strong or resilient the labor market truly is.

Fed Governor Christopher Waller sees rising risks in the labor market. He highlighted that private sector job creation has slowed sharply, averaging just 52,000 jobs per month from May to July—roughly half the pace of early 2025—a number that is likely to be revised even lower, potentially into negative territory. Quits rates and job-switcher wage gains have declined, unemployment among cyclical groups like teenagers is climbing, and businesses are holding back hiring amid tariff uncertainty and AI-related disruptions. Waller argued that these trends point to weakening labor demand rather than just reduced labor supply, and warned that waiting for unemployment to rise before cutting rates could mean acting too late.

Given this uncertainty, Chair Powell hinted at a risk management approach, and left open the possibility of a policy recalibration at the upcoming meeting. While he was not explicitly committal, his tone marked a noticeable shift from his previous stance.

Our take: The labor market has softened

We believe the labor market has softened to a degree that cannot be fully explained by supply factors alone, and it is therefore prudent for the Fed to consider cautious “insurance cuts” at the next meeting. We agree that the balance of risks has shifted, making this an appropriate time for policy recalibration.

One of the key variables is monthly non-farm payroll (NFP) growth, with net job creation averaging just 35,000 per month over the May–July period. This is a clear sign of labor-market softening, in our view.²

Some argue that lower immigration and labor supply constraints explain this weakness and that reduced net job creation is therefore less alarming than in the past. While labor supply has indeed slowed, we believe the sharp drop in labor demand is a concern in its own right. Moreover, average monthly job growth of just 35,000 is well below most estimates of the demographic trend—i.e., too low to be explained purely by supply factors.

We also doubt that recent immigration policy changes would translate so quickly into a short-term decline in labor supply growth—though they may later in the cycle. Labor supply is not merely a function of immigration. Historically, when the economy strengthens and the labor market tightens, labor-force participation tends to rise, as previously discouraged workers reenter the labor force. Conversely, when growth slows, participation can cyclically decline, creating the appearance of weaker labor supply, even though this effect largely reflects so-called “hidden unemployment” or underemployment, rather than structural constraints. We, therefore, expect labor supply to improve when the economy regains momentum—meaning current low numbers are likely due more to cyclical weakness than immigration trends alone.