FILE PHOTO: The exterior of the Marriner S. Eccles Federal Reserve Board Building is seen in Washington, D.C., U.S., June 14, 2022. REUTERS/Sarah Silbiger/File photo

By Ann Saphir

(Reuters) -Federal Reserve policymakers look set to kick off a series of interest rate cuts this month to shore up an increasingly fragile labor market, after a government report on Friday showed job growth nearly stalled and the unemployment rate rose in August.

While Fed Chair Jerome Powell is likely to interpret the addition of a paltry 22,000 jobs last month with caution, given the drop in immigration, the tick up in the unemployment rate to 4.3% - the highest level since October 2021 - will raise some alarm bells. With employers hiring only slowly, Powell said last month, any increase in what has been a very low rate of layoffs could lead to a sharply higher jobless rate.

More than a quarter of those out of work have now been looking for a job since at least the beginning of February, just weeks into President Donald Trump's second term in the White House, Friday's data showed. Unemployment for Black Americans, who typically are more vulnerable to job market downturns, jumped to 7.5%.

The Fed will get fresh inflation data next week as policymakers prepare for their September 16-17 policy meeting, and consumer price increases are expected to accelerate as Trump's tariffs put a bigger imprint on what people pay for basic goods.

Even so, the weaker-than-expected jobs data have put concerns about deterioration of the labor market on the front-burner. The Fed has kept its benchmark interest rate in the 4.25%-4.50% range all year.

"The August jobs report should cement a shift in the Fed's thinking from worrying about inflation to focusing on labor market weakness," Bank of America economists said after the release of the jobs report. The Wall Street firm now sees quarter-percentage-point rate cuts in September and December, and a Fed policy rate of 3.00%-3.25% by the end of next year.

TRUMP PRESSURE

At the Kansas City Fed's annual central bankers symposium in Jackson Hole, Wyoming two weeks ago, Powell telegraphed a rate cut in September with remarks that highlighted downside risks to the labor market, but he said that stable labor market conditions would allow the Fed to "proceed carefully."

White House economic adviser Kevin Hassett said Friday's data could move the Fed to consider resuming its monetary policy easing with a bigger rate cut this month. That view is in line with Trump's longstanding demands for the Fed to slash borrowing costs that have fueled the president's aggressive moves to exert control over the U.S. central bank. Hassett is among those Trump has said he is considering to succeed Powell when the Fed chief's term expires next May.

A bigger-than-usual rate cut this month remains a long shot in the view of financial markets, where futures tied to the Fed's policy rate reflected about a 10% chance of a half-percentage-point reduction in short-term borrowing costs this month, up from zero before the jobs report.

The majority of bets centered on a quarter-percentage-point rate reduction, with the same-sized cuts seen at each of the next policy meetings and a nearly 50-50 chance that by January the short-term benchmark rate will be a full percentage point lower than it is today.

Not all analysts discounted the view of a more aggressive response.

"Today's data suggests the risk that the Fed may embark on a faster pace of easing than the cautious approach outlined by Powell at Jackson Hole," said Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management.

(Reporting by Ann Saphir and Michael S. Derby and David Lawder; Editing by Aidan Lewis, Nick Zieminski and Paul Simao)