CaliToday (16/12/2025): Federal Reserve Chair Jerome Powell delivered a detailed assessment of the U.S. labor market this week, following the Federal Open Market Committee’s (FOMC) decision to implement its third consecutive interest rate reduction. The announcement comes as investors keenly await the latest employment report, due out this coming Tuesday.
In the press conference following the vote, Powell stated that the decision to cut the benchmark federal funds rate by 25 basis points, bringing the new target range to 3.5% to 3.75%, reflected emerging signs of weakness in the jobs market. This move underscores the Fed’s proactive stance against potential risks to its dual mandate goal of achieving maximum employment.
Telltale Signs of a Slowdown
Chair Powell highlighted several indicators suggesting that the labor market, while still relatively strong by historical standards, is losing its momentum:
Rising Unemployment: The most recent Bureau of Labor Statistics (BLS) report for September showed that the unemployment rate had crept up to 4.4%.
Decelerating Job Gains: The pace of new job creation has slowed "markedly" compared to the beginning of the year.
Softening Employer Demand: Powell noted a "clear softening" in hiring demand from businesses.
The Fed Chair attributed some of the slowdown to structural factors, including a decline in the growth of the labor force due to lower immigration rates and a falling labor participation rate. However, he emphasized that in the context of this "less vibrant and relatively weaker" labor market, the downside risks to employment have increased in recent months.
Policy Nearing "Neutral": The Strategy to Avert a Slump
Despite the acknowledged risks, Powell was careful to stress that the Fed does not see signs of a severe labor market recession. He argued that the cumulative 75 basis points in rate cuts the total reduction over three meetings has successfully moved monetary policy closer to a "reasonably neutral" setting.
"This policy trajectory is designed to sustain the labor market and preempt a sharper decline," Powell stated.
The Fed's recently released Summary of Economic Projections (SEP), often dubbed the "Dot Plot," aligns with this cautionary outlook. The projections forecast that the unemployment rate could reach 4.5% by the end of 2025 before slightly moderating to around 4.4% in the subsequent year.
A Closer Look at the Payroll Data
A crucial and somewhat alarming point in Powell’s remarks focused on the potential overstatement of payroll growth:
"Payroll growth has averaged around 40,000 jobs per month since April. We estimate that this figure has been overstated by about 60,000 jobs per month. That implies that the true pace of job gains during this period may be closer to negative 20,000 per month," Powell explained.
He acknowledged the inherent difficulty in real-time job estimation, noting that significant data revisions are often only implemented during periodic benchmarks. The Fed’s internal analysis suggests the market is already weaker than headline numbers indicate.
Dissenting Voices on the FOMC
While the rate cut was supported by a majority, the decision was not unanimous. Two members of the FOMC cast dissenting votes, advocating for keeping rates steady amidst lingering economic and inflation uncertainties.
Austan Goolsbee, the President of the Federal Reserve Bank of Chicago, was among the dissenters. Goolsbee cautioned that without clearer evidence of a rapid deterioration in the labor market, continued rate cuts might be premature, especially given that inflation remains above the Fed's 2% target.
The market now turns its attention to the upcoming employment report, which will either confirm the Fed’s cautious assessment or provide evidence that the labor market remains resilient, influencing expectations for future policy moves.