The Fed may continue to cut interest rates.

Trụ sở Cục Dự trữ liên bang Mỹ tại Washington DC. (Ảnh: Kyodo/TTXVN)

The headquarters of the US Federal Reserve in Washington D.C. (Photo: Kyodo/VNA)

In the "showdown" at the US Federal Reserve (Fed) between controlling inflation and limiting unemployment, the latter prevailed on December 10th and could continue to guide policy into 2026 if the weaknesses in the labor market become more apparent.

According to CNBC, in the short term, concerns about the employment situation led to a 0.25 percentage point cut in the central bank's key interest rate, albeit a 9-3 split. Looking ahead, signs suggest policymakers may be more inclined to cut rates further if the labor market remains weak.

At a press conference on December 10th, Fed Chairman Jerome Powell repeatedly mentioned the possibility of slowing job growth in recent months, a condition that suggests the need for monetary policy easing.

The problem lies in the monthly estimates that the Bureau of Labor Statistics (BLS) makes about how the labor market is affected by the closing and opening of businesses. This estimate, known as the birth-death model, provides a prediction of the number of jobs created by new businesses and the number of jobs lost due to business closures.

Powell said the model may have overestimated jobs by about 60,000 per month since April. With average job growth just under 40,000 during that period, this overestimation is equivalent to a loss of about 20,000 jobs per month. He called this discrepancy “a form of systematic overcounting” and predicted major revisions to the job growth figures.

In September, the BLS released preliminary estimates suggesting that job growth had been inflated by 911,000 jobs in the 12 months leading up to March 2025. Official figures are expected to be released in February.

Powell said: "In a world where job creation is at a negative rate, I think we need to monitor this very carefully and ensure that our policies don't diminish the ability to create jobs."

Balancing support for the labor market and inflation control will be a key policy focus as the Fed heads into 2026. Officials at this week's Federal Open Market Committee meeting—the Fed's most important monetary policy-making body—expressed differing views on the direction of interest rates. Six of the 19 participants indicated they opposed the most recent rate cut (two of whom were voting members), and seven others said there was no need for a rate cut next year.

Conversely, some argue there is still room for further easing. This reflects growing concerns about the labor market, even as inflation remains above the Fed's 2% target. However, Powell stated that much of the inflation surge is due to tariffs imposed by President Donald Trump and their impact is expected to diminish over time.

If the view that inflation is cooling and the labor market is struggling continues, the Fed is expected to lean toward easing, especially when Powell steps down as Fed Chairman in May.

Natixis economist Christopher Hodge wrote: “With the Fed’s most influential members closely monitoring unemployment, we believe that as long as labor demand falls and unemployment rises, the path will be open for further cuts, despite strong opposition from the hawks.”

The stock market rallied strongly on December 10th and 11th amid hopes that the FOMC's statements wouldn't be as hawkish as feared. However, futures prices suggest the next interest rate cut won't occur until at least April 2026. Traders are also betting on the possibility of two rate cuts in 2026, a more optimistic outlook than the single cut predicted by the Fed's rating chart. Even the CME Group's FedWatch index has a 41% chance of three rate cuts.

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