Labor Market Weakness Set to Shape This Week’s Expected Fed Rate Cut
When Federal Reserve policymakers meet this Wednesday, many analysts expect them to approve another interest rate cut. But this decision comes at a complicated moment: inflation is still above the Fed’s target, and the labor market continues to weaken. According to a Fox Business report, both issues are weighing heavily on the committee’s thinking.
Most market watchers believe the Fed will cut the federal funds rate by 25 basis points, marking the third straight reduction. But expectations have shifted widely over the last month due to uneven economic data and delays caused by the government shutdown.
Fed futures tools showed only a 30% chance of a cut on Nov. 19, down from 98% one month earlier. By Dec. 5, odds rebounded to 87%, reflecting new signs of labor market stress.
Minutes from the Fed’s November meeting showed disagreement among policymakers. Some members warned that lowering rates too soon could slow progress on inflation. Others argued that weakening employment conditions justify a shift toward a more neutral policy stance.
Layoffs Reach Their Highest Level Since the Pandemic
Recent data shows growing signs of strain in the job market.
A report from Challenger, Gray & Christmas found that companies announced 1.17 million layoffs through November 2025 the highest level since the peak of COVID-19 job cuts in 2020.
At the same time, ADP reported that the private sector lost 32,000 jobs in November, driven largely by 120,000 job losses at small businesses, while larger firms added only modest numbers.
These trends introduce pressure on the Fed to support the job market, even as inflation remains above ideal levels.
The Fed’s preferred inflation measure the Personal Consumption Expenditures (PCE) index posted a 2.8% increase for headline PCE and 2.9% for core PCE in September. Those numbers remain above the Fed’s 2% target and reflect the latest available data due to shutdown delays.
Economists Say Policymakers Face Three Key Questions
Gregory Daco, Chief Economist at EY-Parthenon, said the Fed must balance three major factors at this week’s meeting:
- How long tariff-driven inflation will last
- How weak the labor market truly is
- Whether interest rates are already close to neutral
Daco noted that inflation tied to tariffs is becoming more difficult to predict because new economic forces are emerging, including shifts in global trade, changes in immigration patterns, and rapid adoption of artificial intelligence.
Economists Expect a Cut — But With Possible Dissents
First American Senior Economist Sam Williamson said a rate cut remains the likely outcome.
“The FOMC is expected to lower the federal funds rate by another 25 basis points, bringing the range to 3.50–3.75%,” he said. “It would be the third cut since summer as the committee aims for a more neutral stance.”
Williamson emphasized the challenge caused by missing employment data.
Because the government could not publish full October and November jobs reports, policymakers are relying on September’s numbers, which already showed the unemployment rate at 4.44% above the Fed’s range for “maximum employment.” That increase signals growing labor weakness.
With inflation risks still present, Williamson expects multiple dissents from committee members on both sides some wanting a slower pace of cuts, others pushing for faster action.
Update to the Fed’s Economic Projections Will Be Key
This week’s meeting will include a new Summary of Economic Projections (SEP). The SEP offers policymakers’ forecasts for:
- Economic growth
- Inflation
- Unemployment
- Future interest rates
Williamson expects the update to closely resemble the September report, though the median unemployment projection for 2025 may rise slightly to around 4.6%, with inflation forecasts near 3%.
Looking ahead, he said the Fed may keep its 2026 median policy rate at 3.375%, which would imply only one additional cut next year. However, even small adjustments from a few officials could shift the median and spark sharp reactions in financial markets.
Mortgage Rates Likely to Move Slowly, Not Sharply
Even with rate cuts, Williamson believes mortgage rates will ease only gradually.
“Mortgage rates are likely to stay in the low-6% range and drift down slowly, rather than falling back to 3–4% levels seen in the last cycle,” he said.
But he also pointed to early signs of improvement in housing affordability. Home-price growth has cooled, incomes are rising faster than prices, and mortgage rates have eased slightly. Together, these factors are helping buyers regain some purchasing power.
“Affordability is finally moving in the right direction,” Williamson said. “The progress will be steady, even if mortgage rates don’t drop significantly.”
What to Watch Next
This week’s Fed decision will set the tone for early 2026. With layoffs rising, inflation still elevated, and missing data clouding the full economic picture, the Fed faces a delicate balancing act.
Wednesday’s announcement along with the updated SEP and policymakers’ comments will offer the clearest signal yet of how the central bank plans to guide the economy through a period of rising labor stress and lingering inflation pressures. For direct financing consultations or mortgage options for you visit 👉 Nadlan Capital Group.
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