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(Bloomberg) -- With the Federal Reserve set to begin cutting interest rates in a few weeks, the main question now is how big the first reduction will be. Monthly US employment data due Friday will probably determine the answer.

Investors are on the edge of their seats after the release of the July jobs report last month showed a rise in the unemployment rate to a level that triggered a popular recession indicator, fanning fears in financial markets that the economy may be on the brink of a downturn.

Stocks have since rebounded, and forecasters expect the report for August to show a bounce in hiring alongside a downtick in unemployment after four straight months of increases. But Fed Chair Jerome Powell made it clear in an Aug. 23 speech that the central bank is now more concerned about risks to the labor market than inflation, and another bad report would bolster the case for an outsize rate cut.

“The jobs report is always one of the more important monthly economic indicators in the US, but its relevance is certainly elevated,” said Sal Guatieri, senior economist at BMO Capital Markets. “A lot of focus will be on certainly the next jobs report — but also future jobs reports — in determining the Fed’s policy actions.”

The shift in focus at the Fed has helped prompt a similar turn in financial markets lately: Investors have begun reacting more aggressively to employment data than inflation numbers. As a top Morgan Stanley strategist put it last month: “It’s about the labor data, period.”

That marks a return to the pattern that prevailed pre-Covid, when price pressures were a mere afterthought. During the bout of inflation spurred by the pandemic, jobs data became secondary to indicators like the consumer price index — though the swift moderation of inflation in recent months has once again made it less exciting in the eyes of market participants.

Take the bond market, for example. Over the past three months, two-year Treasury yields — the ones most sensitive to Fed policy — moved nearly three times more after employment data releases than CPI releases. When the July employment report published last month came in worse than forecasters had anticipated and triggered the so-called “Sahm Rule” recession indicator, it became a major factor in a $6.4 trillion global market selloff.

“If now you put a lot more weight on every single payroll report, then you could get back to an extremely volatile environment,” said Gregory Daco, chief economist at EY. “Unfortunately, many economists, many Wall Street investors tend to mark to market, and they tend to react emotionally.”

Campaign Trail

Concerns about jobs have become a focal point not only for Wall Street, but also on the campaign trail. A gauge of consumer sentiment out last week showed Americans are growing increasingly pessimistic about the state of the labor market, with the share of respondents reporting that jobs are hard to get at the highest since early 2021.

Ashley Turner has applied for nearly 200 roles since being laid off from her marketing position a year ago. Despite expanding her search beyond her field, the 32-year-old has landed only eight interviews, and is now considering applying for contractor roles or even starting her own business.

Turner, who lives in Houston, said the job market is more of a concern for her than inflation, and also a top issue when it comes to November’s presidential election.

“It just seems like there’s some disconnect within the last year that’s just not adding up,” she said.

Former President Donald Trump, the Republican nominee, has tried to pin his opponent, Vice President Kamala Harris, as responsible for the recent deterioration in the labor market as a member of the Biden administration.

For her part, Harris is so far focusing on measures that would provide some relief on the inflation front. In a recent interview on CNN, she said that helping address economic woes and bolstering the middle class would be her day one priority, without offering much in the way of specific plans.

“Everyone experiences high inflation, and it will be a smaller subset who experience unemployment,” said Veronica Clark, an economist at Citigroup Inc. “But people would be worried about it — even if you don’t lose your job, and that’s where it almost feels a little bit worse.”

--With assistance from Ye Xie.