There’s a ‘growing risk’ Fed will have to cut interest rates by 50 basis points in December to ‘catch up’ to a sagging labor market, Oxford Economics says

Finance·Federal ReserveThere’s a ‘growing risk’ Fed will have to cut interest rates by 50 basis points in December to ‘catch up’ to a sagging labor market, Oxford EconomicsBY Paolo ConfinoBY Paolo ConfinoReporterPaolo ConfinoReporterPaolo Confino is a reporter on Fortune’s global news desk where he covers each day’s most important stories

SEE FULL BIO The Federal Reserve has yet to cut interest rates this year

Al Drago/BloombergThe chances the Federal Reserve will cut interest rates by 50 basis points in December are growing, according to Oxford Economics

The June jobs report showed strong headline numbers, but the underlying data pointed to a weakening labor market

If it cratered unexpectedly the Fed would be forced into such a large rate cut

Interest rate cuts will be a crystal ball

Amid a cloudy outlook, they’ll reveal either good economic fortune or a downturn

On the one hand, interest rate cuts could mean the Federal Reserve has finally deemed the threat of inflation has passed and economic forecasts stable again after the tariff-induced uncertainty

That is the outcome investors and President Donald Trump would most welcome

But until any of that uncertainty subsides, interest rates will remain where they are

There is, however, one scenario, in which rate cuts aren’t a sign of eagerly awaited relief but of the start of a long-feared downturn

In the event the labor market suddenly starts to go south, the Fed would have to step in and cut rates

In that case, investors and the president would get more than they bargained for: an interest rate cut of 50 basis points

A rate cut of that size, double the usual 25 basis points, would only come if unemployment spiked and companies stopped hiring later in the year

The Fed started its holding pattern, largely worried Trump’s tariffs would reignite inflation

But in recent weeks, there has been a greater focus on unemployment—the other side of its dual mandate

Investors, too, are worried the labor market may be teetering. “We think the risk is growing that the first cut is 50 basis points,” said Nancy Vanden Houten, lead U

Economist at Oxford Economics

Oxford Economics still forecasts a single rate cut of 25 basis points in December

But the fact the firm is entertaining a jumbo rate cut points to genuine fears the bottom may fallout from the labor market quickly, even dramatically

It’s the nature of the labor market slump that matters more than anything else

If it is “unexpected in a shock kind of way, that would motivate a 50-basis-point reduction at the end of the year,” said Jose Torres, senior economist at Interactive Brokers. “You would need things to go bad really quickly towards the end of the year for that to happen. ” If the bad news is swift and severe, then the Fed will have to scramble. “We do see a growing risk that the first move is larger, i. 50 basis points, because we think the Fed at that point may have some catching up to do” with the labor market, Vanden Houten told Fortune

The current labor market is remarkably stable despite the market turbulence that surrounded the original tariff announcements in April

Under the surface, though, there are some subtle changes indicating it is loosening

In June, the unemployment rate actually ticked down to 4. 2%, according to data from the Bureau of Labor Statistics

Those nuances don’t point to a labor market in imminent danger, but one that is shifting beneath the economy’s feet. “The numbers aren’t horrible, allowing the Fed to focus more on inflation right now,” Vanden Houten said. “The data allow the Fed to breathe a little easier, although there were definitely some quirks in the June employment data that bably made the labor market look a little better than it is. ” Economic growth would have to significantly underperform expectations and hiring levels would need to be below 50,000 a month in October and November for the economic picture to worsen quickly enough to force a 50 basis point cut, according to Torres

The possibilities of both happening are unly at the moment

Investors expect growth and the labor market to slow later in the year, but not to those levels

Wall Street firms and economists lowered their forecasts for year-end growth and raised those for inflation, mainly citing tariffs

Some have revisited those jections, lowering them further, as Trump’s looming tariff deadline looms

That said, have remained steady amid a renewal of Trump’s tariff whirlwinds

In fact, were largely unmoved earlier this week as Trump announced a series of new and possibly definitive tariffs on a host of countries—all of which came after the S&P 500 hit a new all-time high at the start of July

Explore this year's list.