Policymakers are concerned that waiting for clear data on labor market weakness could be too late. They recognize that once layoffs start to "snowball" and feed on each other, the deterioration can accelerate rapidly and non-linearly, making it crucial to be forward-looking rather than reactive to lagging indicators.
Related Insights
A rapid, significant (e.g., 5%) spike in unemployment over a short period (e.g., 6 months) due to AI would trigger an immediate and massive political and economic response. This would be comparable in speed and scale to the multi-trillion dollar stimulus packages passed during the COVID-19 pandemic.
The Fed's latest projections are seemingly contradictory: they cut rates due to labor market risk, yet forecast higher growth and inflation. This reveals a policy shift where they accept future inflation as a necessary byproduct of easing policy now to prevent a worse employment outcome.
The Bureau of Labor Statistics' decision to delay key employment reports until after the December FOMC meeting has dramatically reduced the probability of a rate cut. This 'data vacuum' forces the Fed to be cautious and lean hawkish, as making a dovish pivot without supporting data is too risky.
While political pressure on the Federal Reserve is notable, the central bank's shift towards rate cuts is grounded in economic data. Decelerating employment and signs of increasing labor market slack provide a solid, data-driven justification for their policy recalibration, independent of political influence.
The Fed's sudden dovish turn, despite admitting no new information was gathered, shows it reacts to immediate pressures like a weakening labor market rather than adhering to long-term inflation targets. This makes its forward guidance unreliable for investors.
When questioned on the effectiveness of one 25bps cut for the labor market, Fed Chair Powell replied it would do "nothing" but that "it's the path that matters." This statement implies the Fed is not making a one-off adjustment but beginning a deliberate easing cycle.
The Fed projects the unemployment rate will average 4.5% in Q4—a significant increase—yet it only forecasts one additional rate cut in 2026. This inconsistency suggests the Fed may be forced to deliver more cuts than currently communicated if its own unemployment scenario materializes.
Fed Chair Powell highlighted that annual benchmark revisions to labor data could reveal that the U.S. economy is already shedding jobs, contrary to initial reports. This statistical nuance, creating a "curious balance" with a stable unemployment rate, makes the Fed more inclined to cut rates to manage this underlying uncertainty.
The FOMC's recent rate cut marks the end of preemptive, "risk management" cuts designed to insure against potential future risks. Future policy changes will now be strictly reactive, depending on incoming economic data. This is a critical shift in the Fed's reaction function that changes the calculus for predicting future moves.
Jerome Powell's "driving in fog" analogy highlights the Fed's strategy of using uncertainty, such as a government shutdown delaying economic data, to justify slowing down policy changes like rate cuts. This gives them flexibility to guide markets later through speeches without being locked into a specific path.
