Top Federal Reserve officials have left the door open to half-point interest rate cuts, even as they signalled the US central bank would move cautiously at its meeting this month following a mixed jobs report on Friday.

In appearances on Friday, governor Christopher Waller and president John Williams of the New York Fed endorsed a series of rates cuts this year given the fall in inflation and softening of the US labour market.

Now that “downside risks” had increased, Waller said the economic backdrop “requires action” from the Fed to avoid undue damage to the labour market, which he said was “continuing to soften but not deteriorate”.

Waller stressed the economy was “performing in a solid manner” with “good” prospects for continued growth, adding he expected rate cuts would be “done carefully”. The latest jobs report, he said in a moderated discussion, was no cause for panic but represented a return to a more “normal” pace of growth.

But he signalled he was open to cutting more aggressively if the data warranted it — comments that sparked a rally in US Treasuries.

“If the data suggests the need for larger cuts, then I will support that,” he said.

The two-year Treasury yield, which closely tracks interest rate expectations, dropped 0.1 percentage point to 3.65 per cent, while the benchmark 10-year yield fell 0.02 percentage points to 3.71 per cent.

Fed funds futures markets fluctuated on Friday, at one point pricing in a higher probability of a half-point rate cut from the Fed this month. Those bets were scaled back, however, but traders still expect more than a full percentage point of cuts this year, suggesting the central bank may have to escalate its response.

US stocks also sank on Friday, with the S&P 500 down 1.7 per cent and the technology-heavy Nasdaq Composite gauge shedding 2.5 per cent by the mid-afternoon in New York.

Williams also signalled that the Fed would react to incoming data as needed even as he underscored the economy remains on solid footing and monetary policy was “well positioned” to keep it that way.

Their comments came just after data showed the US added 142,000 jobs in August, while the unemployment rate ticked lower to 4.2 per cent.

The figures from the Bureau of Labor Statistics released on Friday came in below economists’ expectations for 165,000 new positions but surpassed the downwardly revised 89,000 jobs created in July.

A month ago, the BLS reported employment in July rose by just 114,000, which lifted the unemployment rate to 4.3 per cent and sparked concerns that the world’s largest economy was heading for a recession.

Fed officials will meet on September 17-18 when they are expected to agree to lower rates by a quarter point from their current 23-year high of 5.25 per cent to 5.5 per cent.

Analysts said market expectations for a 0.5 percentage point cut in September was an overreaction.

“The market is overly worried about a recession, and this report shows that there is no sign of a recession,” Torsten Slok, Apollo Global Management’s chief economist, said. “There is no need to go 50 [basis points] when the unemployment rate is falling.”

Fed officials are scrutinising the labour market for signs of weakness as they try to push inflation back down to the central bank’s 2 per cent target, which is based on the annual change in the personal consumption expenditures index.

Core PCE, which strips out volatile food and energy prices and is closely watched by policymakers, was 2.6 per cent in August, compared with a peak of more than 5 per cent in 2022.

The increase in August payrolls was in line with the average pace of jobs growth in recent months but marked a slowdown from the monthly gain of 202,000 over the past 12 months, according to the BLS. Construction and healthcare sectors were the strongest. The manufacturing sector recorded job losses.

Combined, employment in June and July was 86,000 roles lower than previously reported, stoking concerns that the labour market started losing momentum earlier than thought. For the month, average hourly earnings increased 0.4 per cent, translating to a 3.8 per cent year-on-year rise.

Williams forecast the unemployment rate would steady at about 4.25 per cent this year as the economy expanded by as much as 2.5 per cent, indicating little concern about an impending recession.

While Tom Porcelli, chief US economist at PGIM Fixed Income, does not expect the Fed to deliver a half-point cut this month, he said the data warrants multiple ones, underscoring the vast range of views about the economic outlook.

“If you’re waiting for evidence to show up in the most lagging of economic indicators — the payrolls report — then you are already late,” he said.

In an interview on Friday, former New York Fed president William Dudley said he was also fearful the Fed was moving too slowly, having previously advocated for the central bank to cut rates in July. He said both a recession and a soft landing were “in play”.