How Slow Job Growth is Influencing Fed Policy

Introduction

Hello and welcome to this month’s Market Update for September 2025. My name is Steve Latham, and I am the Chief Investment Officer for Bernicke Wealth Management. And this month we’re going to be talking about the employment picture. This is something that the Federal Reserve has been focusing on quite keenly over the past couple of months, as the number of jobs added throughout that period of time has fallen off significantly from the trend over the last couple of years.

With the Federal Reserve’s dual mandate of full employment and stable prices, this is starting to cause them to review the way they are conducting their interest rate policy—so much so that they may start cutting interest rates as soon as their next meeting in the middle of September. So let’s look at a couple pieces of key data that they’ll be reviewing to justify lowering interest rates.

Soft Data vs. Hard Data

The first chart here shows soft data versus hard data. We’ve discussed this in previous market updates. Soft data is information that comes from surveys sent out to employees and businesses about what’s happening with their operations—it’s based on sentiment and not necessarily quantifiable. Hard data is where you’re looking at industry statistics, inflation figures, and concrete numbers such as how many jobs have been created.

When you compare the two, you can see how sentiment about the economy may differ from the actual data on the ground. This is exactly what we are seeing here with employment surveys.

The blue line in this chart represents U.S. employment expectations, aggregated through surveys—the soft data. The darker line shows the change in non-farm payrolls, essentially how many jobs have been added month over month. Going back several decades, you can see that these two trends typically move closely together. The expectations for the economy usually align with the actual employment data.

What’s interesting right now is that expectations, the light blue line, are trending downward. Job expectations are close to levels we haven’t seen since the Great Financial Crisis. However, the actual number of jobs being added is still positive. Historically, these two series have been correlated, which raises the possibility that payroll growth may weaken further in order to catch up with expectations. That’s one dynamic the Federal Reserve is watching carefully.

Unemployment Claims Trending Higher

The next chart supports this picture. It shows total U.S. continuing claims, which measure how many people are continuing to claim unemployment insurance. These are workers currently seeking a job but unable to find one.

Going back to the beginning of 2024, we’ve seen a steady increase in continuing claims, from about 1.75 million people seeking unemployment insurance to just below 2 million. The absolute level hasn’t shifted dramatically, but the steady upward climb is concerning. This ongoing increase in unemployment claims is exactly the type of trend the Federal Reserve wants to monitor as it considers preserving employment stability.

How the Market Is Reacting

One silver lining is that financial markets are not showing major signs of stress. While slowing job creation and rising unemployment could appear negative for the economy, markets are still pricing in a relatively stable outlook.

One way to see this is through corporate bond spreads—the difference in yield between corporate bonds, which carry credit risk, and government bonds, which are considered risk-free. When the spread is very tight, it means investors are not demanding much extra compensation for risk. That suggests they are comfortable with the state of the economy and the likelihood that companies will meet their obligations.

Right now, spreads on both investment-grade and high-yield, or junk, bonds are close to all-time lows. This tells us the market is not currently worried about economic deterioration in relation to the jobs market. If there were growing concerns, we would expect those spreads to widen significantly. We saw those spikes during the Covid crisis and during the financial crisis of 2008 and 2009.

Interest Rate Expectations

So for the time being, when we look at the economy, yes, some elements are worrisome, and that’s what the Federal Reserve is focused on. They will be evaluating these employment trends in their upcoming meetings to determine whether the situation justifies rate cuts.

As of now, market expectations are for three interest rate cuts of 25 basis points each before the end of the year. That would mean a total reduction of 0.75 percent in the overnight rate controlled by the Federal Reserve if current predictions prove accurate.

Final Thoughts

That’s all for this month. If you have any questions related to the employment picture, the economy, inflation, or anything else, please don’t hesitate to reach out. We’re always happy to answer your questions. Thank you.