NEW YORK—U.S. stock markets took a hit on Friday as Wall Street grappled with a troubling question: Has the job market slowed just enough for the Federal Reserve to consider cutting interest rates, or are we on the brink of an economic downturn?

After a promising start, the S&P 500 saw its earlier gains evaporate, dipping 0.3% below the all-time high it reached just a day prior. Meanwhile, the Dow Jones Industrial Average experienced a rollercoaster day, plummeting by 220 points, or 0.5%, after flipping between a gain of nearly 150 points and a staggering loss of 400. The Nasdaq composite didn't fare much better, slipping by less than 0.1%.

In a striking move, the bond market reacted more decisively, with Treasury yields sinking following a Labor Department report indicating that U.S. employers hired fewer workers in August than anticipated. Alarmingly, earlier hiring estimates for June and July were revised down by 21,000 jobs.

These disheartening figures come on the heels of last month’s disappointing jobs report, contributing to a growing sentiment among traders. According to data from CME Group, there's now a 100% probability that the Fed will implement a rate cut at its upcoming meeting on September 17. While rate cuts can revitalize the economy, they add fuel to inflation, which the Fed has been wary of.

This year, the Fed has prioritized controlling inflation—partly influenced by President Trump’s tariffs—over responding to job market fluctuations. However, Brian Jacobsen, chief economist at Annex Wealth Management, suggests that the recent job numbers might prompt the Fed to consider a more aggressive cut.

Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, emphasized the seriousness of the situation: "This week has been a story of a slowing labor market, and today’s data was the exclamation point." Strong job growth in the health care sector had previously buoyed the market, but as signs of decline appear, the underlying stability of the job market looks increasingly fragile.

Despite the disappointment, the job market isn't weak enough to scream recession just yet, and the U.S. economy is still on an upward path. The big question for investors is whether the job market can find that precarious balance—strong enough to avoid recession but weak enough to encourage rate cuts.

This uncertainty created a turbulent atmosphere on Wall Street, leading to the recent market swings. Investors are looking for optimal conditions, having pushed stock prices to record highs in anticipation of a "Goldilocks scenario"—where interest rates decrease while the economy continues to thrive.