Cooling jobs report resets Fed interest-rate cut bet

The U.S. labor market is showing clearer signs of strain, just as the Federal Reserve weighs how quickly to cut interest rates next year.The “low-fire, low-hire” trend rippling through the labor market has set investors, businesses, and consumers wondering how the Federal Reserve will use new long-awaited data to approach interest-rate cuts next year.Turns out the nation’s unemployment raterose to 4.6% in November, its highest since July 2021. The November rate ticked up from 4.4% in September, the last month the Labor Department reported the unemployment rate.Kevin Hassett, director of the National Economic Council, told CNBC after those data were released that interest rates “could be lower,” echoing the year-long demands of President Donald Trump. The long-delayed government report released Dec. 16 showed that 64,000 jobs were gained in November, while 105,000 jobs were lost in October.Job losses in June, August, and October mean the U.S. economy has shed jobs in three out of the past six months.“The labor market remains weak, but the pace of deterioration probably is too slow to spur the FOMC to ease again in January,” Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, told Bloomberg.

Federal Funds Effective Rate ChartTheStreet/FRED Fed cut interest rates three times in 2025The Federal Reserve lowered rates for a third straight meeting Dec. 10, according to Bloomberg, to support what Chair Jerome Powell called a “gradually cooling” labor market with “significant” risks of a further slowdown.However, Bloomberg reports that Fed officials are split over whether more cuts are needed next year. Traders were penciling in two cuts in 2026.The CME Group FedWatch Tool slightly rose to a 26.6% likelihood that Fed would cut interest rates in January.Fed uses interest rates to set monetary policyThe benchmark Federal Funds Rate controls the cost of short-term borrowing including credit cards and auto loans. The FOMC held the rate steady for most of the year.This “wait-and-see” approach was driven by caution over tariff inflation and trade policy.It then lowered it by a quarter percentage point in both September and October over labor market cooling. The December cut trimmed the target range to roughly 3.50% to 3.75%.2026 interest-rate cut outlookThe Fed’s Summary of Economic Projections in December penciled in just one reduction in 2026.But some policymakers see no further cuts. Related: Fed official forecasts bold path for interest rates, GDP in 2026Markets, however, have been counting on two rate cuts next year.“Overall, the report contains enough softness to justify prior rate cuts, but it offers little support for significantly deeper easing ahead,” Kevin O’Neil at Brandywine Global shared with Bloomberg. “With labor market signals sending mixed messages, the next inflation reading may become the primary driver for markets as we enter the new year,” he said.The Fed is unlikely to put much weight on the jobs report given data disruptions, Goldman Sachs Asset Management's Kay Haigh told Bloomberg.“The report on December’s employment data, released in early January ahead of the next meeting, will likely be a much more meaningful indicator for the Fed when it comes to deciding the near-term policy trajectory,” Haigh noted.Fed’s mandate covers inflation, jobsThe Fed’s congressional mandate requires monetary policy that ensures price stability and low unemployment.Lower interest rates support hiring but can fuel inflation.Higher rates cool prices but can weaken the job market.The two goals often conflict, operate on different timelines and are influenced by unpredictable global events. Jeff Roach at LPL Financial told Bloomberg that the rise in unemployment was driven by an “increase of individuals formerly not in the labor force.’’“The Fed will continue to focus on the fragilities in the labor market to justify further cuts in 2026,’’ Roach said.The FOMC next meeting is Jan. 28.The Labor Department also reported Dec. 16 that retail sales were decelerating, according to The Wall Street Journal.Related: Fed faces 2026 upheaval as economy shifts, Powell exits