The June jobs report sent a clear message to the Federal Reserve — the central bank risks falling behind the curve.

Job gains north of 200,000 last month flattered a report that otherwise suggested the US labor market is quickly cooling off, as the unemployment rate rose to its highest level since November 2021 and wage growth rose at the slowest annual rate since May 2021.

Neil Dutta, head of economics at Renaissance Macro, has become the leading voice on Wall Street arguing the Fed ought to begin its rate-cutting cycle in September. In an email just minutes after Friday's jobs report dropped, Dutta wrote, "[Friday's] employment report ought to firm up expectations of a September rate cut. Economic conditions are cooling and that makes the trade-offs different for the Fed."

In Dutta's view, the Fed's July meeting should set the table for a September cut.

Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards

Forecasts from the Fed released on June 12 suggested officials expected to cut rates just once in 2024. Yet a closer look at the so-called dot plot that aggregates these forecasts shows that moving to prime markets for two cuts in 2024 shouldn't be a tall order.

In June, seven Fed officials expected one rate cut in 2024, but eight forecast two cuts. The difference makers? Four Fed officials who penciled in no cuts this year.

Fed Chair Jerome Powell has sought to downplay the importance of the dot plot over the last year as markets tried to pin the central bank down on increasingly precise forecasts. The absolute accuracy of the dot plot may remain murky, but the direction officials think policy should go is clear.

The shift from March to June saw the need for three rate cuts go out the window.

But a plurality of Fed officials still viewed two cuts as the most likely outcome this year. The recent run of labor market data should provide plenty of fodder for officials in the two-cut camp to bring more colleagues over to their side.

The recent rise in the unemployment rate also brings into play a potential triggering of the Sahm Rule, which has preceded each of the last nine recessions in the US.

The Sahm Rule shows the economy has entered a recession if the three-month average of the national unemployment rate has risen 0.5% or more from the previous 12-month low. After Friday's jobs report, the unemployment rate has risen 0.36% from its 12-month low over the last three months.

'Immaculate disinflation'

Ahead of Friday's June jobs report, data from the CME Group showed investors pricing in a 75% chance the Fed would cut rates in September. Those odds were little changed after the release.

Writing in a note to clients on Friday, JPMorgan economist Michael Feroli said most of the details of the jobs report "were a little on the soft side."

Still, Feroli sees this report outlining a "gradual loosening up of a very tight labor market [that] is consistent with the Fed’s immaculate disinflation narrative and should give the FOMC confidence to lower rate sometime in the second half."

Stocks on Friday had a somewhat muted reaction to the jobs data, but tech stocks did lead markets higher as the prospect of lower interest rates bolstered the outlook for high growth names. Investors appear content, but not overjoyed, by the prospect of an "immaculate disinflation." And after all, the S&P 500 just gained 14.5% in the first six months of the year.

For investors locked in on how economic data might shape the Fed's path, this coming Thursday's Consumer Price Index report will be the next catalyst.

And Friday's jobs report also opens the possibility that we're seeing labor market data overtake inflation readings as the primary needle mover for the Fed.

Inflation, as Powell described last week, has returned to a "disinflationary path." With the Fed's own forecasts suggesting it doesn't see inflation actually reaching its 2% target before the end of 2026, monthly volatility appears baked in.

Less tolerable, perhaps, is the current softening in the labor market. Last month, unemployment was forecast to stand at 4% at the end of this year and at just 4.2% at the end of 2025. A continued uptick in the unemployment rate, therefore, seems to have the teeth to create urgency at the Fed.

Should Powell take Dutta's advice, the Fed chair's July 31 press conference will be a crucial event for the central bank. Powell's testimony before the House and Senate this coming Tuesday and Wednesday may also serve as a time to signal a shift in thinking.

The annual Jackson Hole Symposium, held in late August, has often been used by Fed chairs to telegraph key policy changes over the years — though this year's event may serve less as an occasion for Powell to trial balloon a policy shift but rather as a time to cement a rate cut just a few weeks later.

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