Fed’s Focus Shifts to Jobs, Says ABN AMRO – Implications for Rate Cuts

The Federal Reserve’s policy focus is shifting from inflation to the labor market, according to a note from ABN AMRO, signaling that the central bank is increasingly attentive to employment risks as it considers the timing of interest rate cuts. As of mid-2025, the Fed has maintained its benchmark rate at a range of 5.25%–5.50%, but recent commentary from policymakers suggests that the balance of risks has moved toward supporting job growth.

Why the Fed’s Attention Is Turning to Jobs

The shift reflects a broader reassessment within the Federal Open Market Committee (FOMC). With inflation having cooled from its 2022 peak of 9.1% to around 3.3% as of May 2025, the committee’s dual mandate now places greater weight on maximum employment. ABN AMRO economists argue that the Fed is wary of overtightening, which could unnecessarily weaken the labor market.

Recent data show that nonfarm payrolls have been growing at a slower pace, averaging 150,000 per month over the past three months, down from 200,000 earlier in the year. The unemployment rate, while still low at 3.9%, has ticked up slightly, and initial jobless claims have edged higher. These indicators, though not alarming, have caught the attention of Fed officials who previously focused almost exclusively on price stability.

What This Means for Interest Rate Policy

ABN AMRO’s analysis suggests that the Fed is likely to begin cutting rates in the third quarter of 2025, possibly as early as September. The note points to Chair Jerome Powell’s recent testimony before Congress, where he acknowledged that ‘the labor market is cooling gradually’ and that ‘risks to employment are now more balanced with inflation risks.’ This language marks a departure from earlier statements that emphasized the need to keep policy restrictive until inflation was clearly on a path to 2%.

Market pricing has already adjusted to this shift. Futures markets currently imply a 70% probability of a rate cut at the September FOMC meeting, up from 50% a month ago. If the labor market deteriorates further, ABN AMRO expects the Fed to cut rates more aggressively, potentially by 50 basis points in one move.

Impact on Markets and Investors

For investors, the Fed’s pivot has immediate implications. A rate-cutting cycle typically supports equity valuations, particularly in rate-sensitive sectors like technology and real estate. Bond yields are likely to decline, which could boost the prices of long-duration assets. However, ABN AMRO cautions that if the labor market weakens significantly, it could signal a broader economic slowdown, which would offset some of the positive effects of lower rates.

Currency markets are also reacting. The US dollar has already weakened slightly against a basket of major currencies as traders price in a less hawkish Fed. This could benefit multinational companies with overseas earnings, but it may also raise import costs, adding a new variable to the inflation outlook.

Conclusion

The Federal Reserve’s shift in focus from inflation to jobs marks a critical juncture for monetary policy. ABN AMRO’s assessment aligns with a growing consensus that the central bank is preparing to ease policy to support the labor market. While inflation remains above target, the Fed’s willingness to pivot underscores its commitment to its dual mandate. Investors should monitor upcoming labor data and Fed communications for further signals, as the timing and pace of rate cuts will shape market conditions in the second half of 2025.

FAQs

Q1: Why is the Fed focusing on jobs now?
The Fed is shifting its attention to the labor market because inflation has cooled significantly from its peak, and there are signs of a gradual slowdown in job growth. With price pressures easing, the central bank is balancing its dual mandate, now paying more attention to maximum employment.

Q2: When could the Fed start cutting rates?
According to ABN AMRO, the Fed could begin cutting rates in the third quarter of 2025, with a possible move in September. The exact timing will depend on upcoming labor market data and inflation trends.

Q3: How might rate cuts affect investors?
Rate cuts typically lower borrowing costs and can boost stock valuations, especially in growth sectors. However, if cuts come in response to a weakening economy, the positive impact may be muted. Bond yields are likely to fall, benefiting fixed-income investors, while the US dollar may weaken, affecting currency markets.