Fed May Cut Rates Further as Job Numbers Appear Overstated

The Federal Reserve’s focus appears to be shifting toward concerns about the labor market, a move that could support additional interest rate cuts heading into 2026. While inflation remains above the Fed’s target, signs of weaker job growth may be tipping the balance toward easier monetary policy.

On Wednesday, the Fed voted to cut its benchmark interest rate by 0.25 percentage point, marking the third reduction this year. The decision passed with a 9–3 vote, reflecting growing unease about employment conditions even as inflation pressures persist.

Powell Signals Job Growth May Be Weaker Than Reported

During his post-meeting press conference, Fed Chair Jerome Powell repeatedly pointed to evidence suggesting the labor market may be softer than official numbers show. He indicated that job growth may have turned negative in recent months.

“The labor market has continued to cool gradually,” Powell said.
He added that both household and business surveys show less hiring demand and reduced worker supply.

Powell noted that the slowdown appears slightly faster than policymakers expected, raising concerns about whether current policy settings could further weaken employment.

The Role of a Possible Job Overcount

At the center of the discussion is a statistical estimate used by the Bureau of Labor Statistics known as the birth-death model. This model attempts to estimate jobs created by new businesses and jobs lost from closures.

Powell said the model may have overstated job growth by roughly 60,000 jobs per month since April. During that same period, reported job growth averaged just under 40,000 per month. If the estimate is correct, it would imply that payrolls may have been declining by about 20,000 jobs per month.

Powell described this as a “systematic overcount” and said it could lead to sizable revisions in future employment reports.

Revisions Could Change the Policy Outlook

The concern is not new. In September, the BLS released a preliminary benchmark revision showing job growth was overstated by 911,000 jobs in the 12 months leading up to March 2025. A final revision is expected in February.

“If job creation is negative, we need to be careful not to push employment down further with our policy,” Powell said.

This cautious stance suggests the Fed may be more willing to cut rates if future data confirms ongoing labor market weakness.

Fed Officials Remain Divided

Despite the latest rate cut, opinions inside the Fed remain split. According to the Fed’s latest dot plot, which shows individual rate expectations:

• Six of 19 officials opposed the latest cut
• Seven officials see no rate cuts at all in 2026
• Others believe there is room for more easing if labor conditions worsen

This divide highlights the challenge policymakers face as they balance slowing inflation with rising employment risks.

Inflation Still a Concern, But Risks Are Shifting

Inflation remains above the Fed’s 2% target, but Powell suggested much of the recent pressure comes from tariffs imposed by President Donald Trump. He indicated these effects are likely temporary and should fade over time.

If inflation continues to ease while job growth weakens, the Fed may lean more toward supporting the labor market, especially as Powell prepares to step down as chair in May 2026.

Markets Expect More Rate Cuts

Financial markets are already pricing in further easing. Stocks rose on Wednesday and Thursday as investors interpreted Powell’s comments as less aggressive than expected.

Economists say the Fed could move again sooner than official projections suggest.

“As long as labor demand continues to weaken and unemployment rises, the path is open for additional cuts,” said Natixis economist Christopher Hodge.

Hodge expects the unemployment rate to rise into early 2026 and believes a January rate cut is more likely than not.

Still, futures markets suggest the next cut may not come until April, with traders expecting two cuts in 2026. Some estimates even place a 40% chance of three reductions, according to CME Group’s FedWatch data.

What This Means Going Forward

If upcoming job reports confirm weaker hiring or outright job losses, the case for additional Fed rate cuts will strengthen. While inflation remains part of the equation, the Fed appears increasingly focused on avoiding unnecessary damage to the labor market.

As 2026 approaches, employment data not inflation alone may play the key role in shaping U.S. monetary policy. For direct financing consultations or mortgage options for you visit 👉 Nadlan Capital Group.