Why the labor market could be the only hope for another Fed rate cut
President Trump’s back-and-forth trade policy has created added uncertainty among investors still searching for clarity on the Federal Reserve’s next move, with tariffs muddying the inflation outlook.
But some on Wall Street think the labor market, not inflation, is the place to look for better clues on what could push the Fed to cut rates later this year. Just look at what happened in September when the central bank delivered a jumbo 50 basis point cut, largely to protect the jobs market after the unemployment rate unexpectedly jumped.
“The number one risk remains an inflection higher in the unemployment rate, which is the key macro data for the foreseeable future,” Citi analyst Stuart Kaiser wrote in reaction to last week’s Fed decision.
A healthy labor market is a critical element of the Fed’s dual mandate to achieve price stability and maximum employment. And the central bank has already indicated it would not keep interest rates elevated at the expense of a rapidly deteriorating labor market.
Federal Reserve Board Chairman Jerome Powell holds a press conference following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, Sept. 18, 2024. REUTERS/Tom Brenner · REUTERS / Reuters
Federal Reserve Chair Jerome Powell categorized the US labor market as “stable” and “broadly in balance” during his Jan. 29 press conference, pointing to strong headline numbers and a low unemployment rate. But that strength also means any signs of a slowdown will be even more amplified.
Economists have called out pockets of market softness in recent weeks, like rising long-term unemployment and the mix of available jobs. That’s created a “low hire, low fire” environment, which Powell himself acknowledged as a concern.
“It’s a low hiring environment,” Powell said last week. “So if you have a job, it’s all good. But if you have to find a job, [the] hiring rates have come down.”
“If there were to be a spike in layoffs,” he continued, “if companies were to start to reduce headcount, you would see unemployment go up pretty quickly because the hiring rate is quite low.”
And if history is any indication, an unexpected spike in the unemployment rate would be enough for the Fed to recommit to rate cuts.
The latest data from the Bureau of Labor Statistics released Tuesday underscored some of these labor market trends, with the hiring rate holding steady at 3.4%, well below its 2022 peak of 4.6%, and near its lowest level since 2013.
Meanwhile, recent survey data from the Conference Board noted a deterioration in consumers’ employment expectations, suggesting households more generally struggled to find work last month.
That’s likely to remain a challenge with the Department of Labor revealing on Thursday that continuing claims, or ongoing weekly unemployment benefits previously filed by workers, ticked up by 36,000 week over week to hit 1.89 million, holding near the highest levels since November 2021.
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The January jobs report will be the latest test of potential weakening. The report, due Friday morning, is expected to show the US economy added 150,000 jobs last month, down from the 256,000 seen in December. Meanwhile, the unemployment rate is expected to hold steady at 4.1%. The report will also include revisions to labor data from the past year.
“Labor conditions so far have not materially changed,” Jeffrey Roach, chief Economist at LPL Financial, wrote in a note last week. “But a surprise in next Friday’s payroll report could shift the narrative.”
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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