Arguments for additional Fed price cuts could possibly be primarily based on a “systematic overcounting” of jobs

In the Federal Reserve’s battle between fighting inflation and limiting unemployment, the latter side came out on top on Wednesday and could also have an advantage through 2026, when labor market weakness becomes more evident through an apparent job overcount.

In the short term, worries about employment led to a vote, albeit by a 9-3 margin, to cut the central bank’s key interest rate by a quarter of a percentage point. There are signs that policymakers will be more inclined to make further cuts in the future if the labor market remains weak.

At his press conference on Wednesday, Chairman Jerome Powell mentioned several times that there had likely been negative job growth in recent months, a condition that would favor looser monetary policy.

“The gradual slowdown in the labor market has continued,” Powell said. “Surveys of households and businesses show both declining supply and demand for labor. So I think it’s fair to say that the labor market has continued to gradually cool, just a little slower than we thought.”

It’s a monthly estimate from the Bureau of Labor Statistics of how closing and opening businesses affect the job market. The estimate, known as the birth-death model, estimates how many jobs are gained through openings and lost through closures.

Powell said the model likely overstated the number of jobs by about 60,000 per month since April. With average job growth of just under 40,000 over this period, an overstatement of this magnitude would equate to a loss in wages of around 20,000 per month.

Powell urges caution

The chairman described the discrepancy as “something like a systematic overcount” that is likely to lead to significant revisions to job growth figures.

In September, the BLS released a preliminary benchmark estimate that overstated job growth by 911,000 in the 12-month period ending in March 2025. A final figure is due to be published in February.

“In a world where job creation is negative, I just think we need to monitor this situation very carefully and be able to not slow down job creation with our policies,” Powell said.

As we enter 2026, balancing labor market support with controlling inflation will be central to Fed policymaking.

At this week’s meeting of the Federal Open Market Committee, officials expressed broadly different views on where interest rates should go. Six of the 19 participants said they opposed the latest rate cut – two of them were among the 12 voters – and seven said they see no need for cuts next year, according to the dot plot of individual expectations.

On the other side are those who believe that there is at least room for further easing. That would indicate greater concerns about the labor market, even if inflation is above the Fed’s 2 percent target. However, Powell said much of the excess inflation was due to President Donald Trump’s tariffs, the impact of which is expected to fade as the months go by.

The market sees further cuts

If inflation were seen to be easing and the labor market to stumble, the Fed would be expected to lean toward easing policy, particularly when Powell leaves chairmanship in May.

“With the most influential members of the Fed keeping a close eye on the unemployment rate, we believe this will continue to be the case as long as demand for labor declines [the] If the unemployment rate rises, the path will be cleared for further cuts, despite vocal opposition from hawks,” Natixis economist Christopher Hodge said in a note.

“As we expect the unemployment rate to rise through the first quarter of 2026, we expect the Fed to continue cutting rates to halt further labor market slowdown,” Hodge added, noting that “we think a cut in January is more likely than not.”

Stocks rallied on Wednesday and Thursday on hopes that the FOMC’s rhetoric wasn’t as hawkish as feared.

Nevertheless, futures market prices suggest that the next cut will not occur until April at the earliest. Traders are also betting on two cuts in 2026, which is more aggressive than the dot plot’s indication of one, with even a 41% chance of three moves, according to CME Group’s FedWatch gauge.