Washington
—
After cutting interest rates three times in a row last year, the Federal Reserve indicated last month it probably won’t lower interest rates again for a while. A months-long pause, cemented by key economic data released Friday, may indeed be the best-case scenario for the world’s largest economy.
The December jobs report showed that hiring in 2025 slowed to levels not seen since the pandemic. But the monthly total came in close to economists’ expectations and the unemployment rate ticked down. That was enough to convince investors with near certainty that the Fed would hold rates steady at its January 27-28 meeting, according to futures. Wall Street now doesn’t expect a rate cut until June.
High interest rates exacerbate affordability issues for many Americans, but high unemployment can cut deeper. Central bankers are tasked with managing this balance, and lowering rates at this point would be an acknowledgement that the labor market has significantly deteriorated.
“The Fed will likely hold course for now with the labor market showing tentative signs of stabilizing,” wrote Lindsay Rosner, head of multi sector fixed income investing at Goldman Sachs Asset Management, in an analyst note Friday.
Focusing on inflation
If the labor market holds steady in the coming months, Fed officials will likely begin to take cues from inflation data to lower interest rates further. This year, inflation will be above the central bank’s 2% target for the fifth consecutive year.
After the release of the December jobs report, analysts at Morgan Stanley updated their forecast for 2026. Now they project one rate cut in June and another September, instead of in January and April.
“Given the improved economic momentum and the decline in the unemployment rate, we see less need for near-term cuts to stabilize the labor market,” they wrote. “Instead, we now think the Fed will cut rates as it becomes clear tariff pass-through is complete and inflation is decelerating toward the 2% target.”
Throughout 2025, employers added jobs at a weak pace, with only a few industries driving job growth as the unemployment rate gradually moved higher. It has put Fed officials in a conundrum, with both sides of their dual mandate of stable prices and maximum employment under stress — and it has divided the Fed’s powerful rate-setting committee.
Economists also expect President Donald Trump’s patchwork of tariffs to fully filter through to consumer inflation this year, likely resulting in a one-time increase to prices. The tariff situation, however, remains uncertain: The Supreme Court this year is expected to determine whether a big chunk of Trump’s tariffs are lawful.
And new research from the San Francisco Fed argues that Trump’s tariffs could lower inflation but bump up unemployment, based on how the economy responded in to major changes in tariffs in the pre-World War II era.
“I think the Fed can remain on hold until June before easing again, and by then, there should be enough signs of lower inflation that would help the Fed feel more comfortable about doing additional cuts to ensure that the labor market remains supported,” said John Canavan, lead US analyst at Oxford Economics.
The economic vibes are still bad
While there may not be an economic emergency to warrant lowering interest rates, Americans still don’t feel great about the US economy.
The University of Michigan’s latest consumer survey, released Friday, showed that consumer sentiment increased in January to 54, up from December’s 52.9. There will be a revised final reading for January later this month.
But January’s reading was still exceptionally weak, hovering below levels seen during the Great Recession. Americans “continue to be focused primarily on kitchen table issues, like high prices and softening labor markets,” Joanne Hsu, the surveys director, said in a news release.
Low consumer sentiment still probably doesn’t mean much for consumer spending, which accounts for about two-thirds of US economic output: Episodes of declining sentiment in recent years did not translate to weaker spending.
“People have jobs, wages are up, and the stock market’s healthy. So people have money and even though they don’t feel good about it, they’re still spending,” Richmond Fed President Tom Barkin said in an interview published on Friday.
“Wealthy people, they’re spending, and depending on how wealthy they are, they’re not doing that much negotiating,” he added. “But the lower income people, they’re still spending, but they don’t want to spend on stuff that’s been priced up. They’re making choices.”