Why a Cooling Labor Market Could Lead to More Rate Cuts in 2026
While a January pause remains likely, a rising unemployment rate and stagnant hiring suggest the central bank must do more to protect the economy next year.
The U.S. labor market just sent a chilling signal to Washington. According to the latest data from the Bureau of Labor Statistics, the unemployment rate climbed to 4.6% in November. This figure represents the highest level since late 2021, highlighting a significant shift in the nation’s economic health. While the economy added 64,000 jobs last month, the broader picture reveals a trend of gradual cooling that could force the Federal Reserve to reconsider its pace for interest rate cuts in 2026.
Policymakers now face a difficult landscape. The delayed October data showed a staggering loss of 105,000 jobs, primarily due to large-scale federal buyouts. Although the November rebound exceeded the 40,000 gain that many economists expected, it did little to mask the underlying weakness. Wage growth also slowed to 3.5%, its lowest point in four years. These figures suggest that the “low-hire/low-fire” environment of the past year has finally tilted toward a slowdown.
Morningstar senior U.S. economist Preston Caldwell said Tuesday’s data “indicates that the Fed was correct to cut again.”
Caldwell notes that while analysts should interpret one month of data with caution, the November release shows an ongoing weakening as the market drifts away from full employment.
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Looming Threat of a Jobs Recession
Despite the small gains in November, a thick fog still shrouds the true state of the workforce. The 43-day government shutdown earlier this year disrupted data collection, leaving statistical agencies understaffed and unable to provide a clear October snapshot until now. When the numbers finally arrived, they painted a grim portrait of a stagnant market. The economy actually lost jobs in three of the past six months: June, August, and October. This represents the first such streak of contractions since the 2020 pandemic.
“The US economy is in a jobs recession,” wrote Heather Long, chief economist at Navy Federal Credit Union.
Long pointed out that the nation added a mere 100,000 jobs over the past six months, with the healthcare industry single-handedly propping up the numbers. Indeed, healthcare and social assistance provided the bulk of the growth, while sectors like manufacturing, transportation, and leisure and hospitality shed workers.
The rising unemployment rate also carries demographic weight. The rate for Black workers jumped to 8.3% in November, marking a four-year high. These distributional consequences suggest that current economic headwinds, including aggressive trade policies and tariffs, disproportionately affect specific groups. Furthermore, the number of long-term unemployed, those out of work for more than six months, rose to 1.9 million. These workers face an increasingly exclusive market where 500 applications might net only a handful of responses.
Divided Fed Faces Foggy Horizon
Central bankers now find themselves in a precarious position. The Federal Reserve’s dual mandate requires it to balance stable prices against maximum employment. With inflation remaining stubbornly above the 2% target, many committee members feel hesitant to ease policy further. However, the 4.6% unemployment rate triggers fresh concerns regarding the Sahm rule. This historical indicator suggests a recession follows whenever the three-month moving average of unemployment rises more than half a percentage point within a year.
While Fed Chair Jerome Powell views recent data with a skeptical eye due to shutdown-related distortions, the market already looks toward 2026. Bond futures traders currently predict a 75% chance that the Fed will pause in January to assess the impact of previous cuts. However, a lackluster start to the new year could quickly change that calculus. If December’s data confirms the current cooling trend, the Fed might need to pivot from a cautious stance to a more aggressive series of cuts.
Caldwell suggests that the upcoming readings will determine the speed of future policy shifts, stating:
“If today’s data is confirmed by subsequent readings, we could see two or three rate cuts in the first half of 2026, rather than the single cut priced in by the market as of yesterday.”
This potential acceleration highlights the growing anxiety among economists who fear that the Fed has waited too long to address the downside risks in the labor market. For now, businesses and workers alike must navigate a foggy horizon, waiting to see if the central bank can engineer a soft landing or if more drastic measures will become necessary.
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