Fed Rate Cut Outlook Hinges on Labor Market, Not Inflation
Amid President Trump's trade policy uncertainties and the Federal Reserve's unclear stance on rate hikes, investors are seeking guidance from the labor market for clues on a potential rate cut later this year.
Labor Market: Key Factor
The central bank's decision to implement a substantial 50 basis point cut in September was primarily driven by its intention to protect the jobs market after an unexpected rise in unemployment. Fed analyst Stuart Kaiser emphasizes that a potential inflection higher in unemployment poses a significant risk and should be closely monitored.
Stable Conditions, but Signs of Slowdown
While Fed Chair Jerome Powell has characterized the US labor market as stable, economists have identified areas of softness, including rising long-term unemployment and a limited availability of suitable jobs. This has led to a "low hire, low fire" situation.
Layoffs Could Trigger Rate Cuts
Powell has acknowledged the low hiring rate, indicating that a spike in layoffs could lead to a rapid increase in unemployment. Historical data suggests that such an event would compel the Fed to reconsider rate cuts.
Latest Data Shows Hiring Slowdown
Recent data from the Bureau of Labor Statistics confirms the labor market's slowing pace, with the hiring rate remaining well below its 2022 peak. Consumer surveys indicate difficulties in finding work, while ongoing weekly unemployment benefits have reached their highest levels since 2021.
January Jobs Report: Critical Test
The upcoming January jobs report will provide further insights into the state of the labor market. Market expectations indicate a slowdown in job growth to 150,000, while the unemployment rate is projected to remain unchanged at 4.1%.
"Labor conditions remain largely unchanged," notes Jeffrey Roach of LPL Financial. "However, a surprise in the upcoming payroll report could alter the outlook."