December 31, 2025      

     Taking note of the softening labor market, the Federal Open Market Committee (FOMC) embarked on a series of rate cuts beginning in September. On December 10^th, as was widely anticipated, they again cut rates for a third consecutive time, lowering the targeted fed funds range to 3.50% to 3.75%. The majority of FOMC has seen unfavorable employment trends as more worrisome than inflation, which remains well above their target. In his post-meeting press conference, Federal Reserve Chairman Jerome Powell said the recent rate cuts should help stabilize the labor market.

     The decision was not unanimous as there were three formal dissents. One governor dissented in favor of a 50 basis point cut, while two Federal Reserve District Presidents dissented to hold rates steady. The lack of unanimity highlights a broadening degree of internal division at the Fed. This division was also in evidence in the “dot plot,” the collection of projected year-end rates by the Committee members was widely divergent. Despite the divergence and dissents, the dot plot showed that the Committee maintains an easing bias.

       The deluge of delayed data released following the FOMC meeting was met with some skepticism, and Chairman Powell had warned that data could be distorted by technical factors. The initial deferred data did not give a clear picture of how the economy was evolving. October’s non-farm payrolls declined sharply, weighed down by federal hiring and federal workers who opted for the deferred federal worker resignation program earlier in the year with the job ending with the fiscal year on September 30^th. The unemployment rate rose to a 4 year high of 4.56% in November, up from 4.44% in September. Behind the increase in unemployment was labor demand cooling more than supply. Overall retail sales were flat due to a decline in auto sales as the EV subsidy ended and gasoline prices fell. Underlying retail sales, however, were better than expected as consumers proved to be resistant. Consumption drove a much stronger than expected 4.3% annualized quarter over quarter estimate of economic expansion in the 3^rd quarter.

     Inflationary pressures have remained elevated, and economists expect inflation to remain above the Fed’s 2% goal as passthrough from higher tariffs add pressure to consumer goods prices. The Consumer Price Index (CPI) for November was well below expectations, however, with the year-over-year headline rate falling to 2.7% from 3.1% and the core (excluding food and energy) rate declining to 2.6% from 3.0%. The government shutdown caused the Bureau of Labor Statistics to skip the October CPI, creating a break in the data that cannot be repaired, along with questions about the accuracy and quality of the data collected for November. Various economists have warned that it may take a while to get a clearer sense of the true path of consumer prices.

     
     The delayed and questionable data has done little post-government shutdown to materially change the economic narrative; employment is on soft footing and inflation remains elevated. While consumer spending has proven resilient, it is expected to slow as consumers’ outlook deteriorates due to the moderation in the jobs market compounded by high prices. This results in the Fed facing tough monetary policy choices going forward. Up to now the central bank has been more focused on cushioning a softening job market than on persistent price pressures. Now, after three consecutive rate cuts totaling 75 basis points, tentative signs of the labor market stabilizing and divisiveness among policymakers, they may be more likely to take a cautious path until they gain more confidence in the data and a clearer picture emerges. Of course, the potential of another government shutdown looms at the end of January potentially leaving this data-dependent Fed back in the dark.