While the bridge between President Trump and Fed Chair Jerome Powell has been well and truly burned, the outgoing central bank chief may yet set the stage for further interest rate cuts that the White House has so doggedly pursued over the past 12 months.
Powell’s stance throughout much of 2025 was wait-and-see, frustrating the Oval Office, which wanted a sharp base rate cut. While economists widely expected a couple of cuts in 2026, perhaps one or two under Powell, the bulk of reductions and a hold at lower rates are expected to come under his successor, Fed nominee Kevin Warsh.
But deteriorating data from the economy may encourage the rate-setting Federal Open Market Committee (FOMC) to act before Powell’s tenure ends in May.
A key motivation for cuts—the most recent of which came in December—can be found in the job market. Maintaining stable, and as close to full, employment as possible is one of the mandates of the Fed, meaning the FOMC may act if it believes lowering the base rate could stoke economic demand, and the jobs market as a result.
The labor market has steadily deteriorated over the past half year—not necessarily in the form of the unemployment rate, which has held fairly steady at around the 4% mark, but rather, the breakeven jobs number needed to maintain that unemployment rate has shrunk. That means fewer and fewer roles are being created, so any uptick in layoffs or a rise in the labor force (because emigration from the U.S. had slowed, for example) would have an outsize impact on the unemployment rate.
A fuller picture of the labor market will be revealed in the Bureau for Labor Statistics’ nonfarms payroll numbers today, not only for January but also revisions for the past few months. The release of this data had been delayed owing to another brief, partial government shutdown.
Policymakers are bracing themselves for a lackluster report today. Some hints could be seen in ADP’s private payroll data report released earlier this month, which showed just 22,000 roles were added in January. “Job creation took a step back in 2025, with private employers adding 398,000 jobs, down from 771,000 in 2024. While we’ve seen a continuous and dramatic slowdown in job creation for the past three years, wage growth has remained stable,” ADP’s chief economist, Nela Richardson, wrote in the report.
“Administration officials have been keen to stress that a weaker January employment number is not something to worry about. A weaker January number probably would worry markets,” UBS chief economist Paul Donovan told clients this morning. “Slower hiring (not artificial intelligence) has disrupted the labor market, with the burden falling on younger people. That has implications for economic patterns (slower fast food sales, higher student loan delinquencies) without being a major overall economic impact to date.”
Yesterday’s Bureau of Labor Statistics Employment Cost Index also supported a dovish stance, showing just a 0.7% increase for the three months to December 2025. The weak increase across compensation costs, be it salaries or benefits, suggests little dynamism in the market to motivate employees to move roles, or for employers to bid higher for talent. The barometer was at its weakest since Q2, 2021.
Knock-on rate effect
This weaker outlook has had a knock-on impact on the rates environment, according to Deutsche Bank’s Henry Allen. He wrote in a note this morning: “Collectively, those releases helped to validate the dovish arguments pushing for more rate cuts this year. So investors priced in more Fed easing in 2026, and there was even a growing sense that Powell might deliver another cut before departing as chair if the data continued in that direction.”
Sluggish data on the consumer side may push that argument further: Retail sales were flat in December from November, when business was up 0.6%, according to a Commerce Department report released this week. Economists were expecting a 0.4% increase for December.
Allen pointed to the likelihood of further cuts this year. CME’s FedWatch barometer, for example, priced a 25 basis point cut at the next meeting in March with a 37% probability.
He added (without citing sources), the “probability of a cut by the April FOMC (Powell’s last as chair) was up to 47% by the close. And looking further out, the amount of cuts priced in by December was up +3.3 bps on the day to 60 bps. In turn, that brought Treasury yields down across the curve, with the two-year yield (–3.3 bps) closing at 3.45%, whilst the 10-year yield (–5.9 bps) fell to 4.14%.”
