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Source: Fortune.com
Summary
Outgoing Fed Chairman Jerome Powell may set the stage for further interest rate cuts, despite his previous wait-and-see stance. The labor market has deteriorated over the past half-year, with the breakeven jobs number shrinking, and policymakers are bracing themselves for a lackluster employment report. The Bureau of Labor Statistics will release nonfarms payroll numbers today, which may show a weaker January employment number. ADP’s private payroll data showed just 22,000 roles were added in January, and economists expect a weaker report. The Employment Cost Index also showed a weak increase in compensation costs, suggesting little dynamism in the market. This weaker outlook has had a knock-on impact on the rates environment, with investors pricing in more Fed easing in 2026.
Our Reading
The numbers tell one story.
Powell’s parting gift may be a series of rate cuts, despite his previous reluctance. The labor market has been steadily deteriorating, with the breakeven jobs number shrinking. ADP’s private payroll data showed just 22,000 roles were added in January, and economists expect a weaker report. The Employment Cost Index also showed a weak increase in compensation costs, suggesting little dynamism in the market. This weaker outlook has had a knock-on impact on the rates environment, with investors pricing in more Fed easing in 2026.
The FOMC may act before Powell’s tenure ends in May, with a focus on maintaining stable employment. The labor market has been steadily deteriorating, with the breakeven jobs number shrinking. ADP’s private payroll data showed just 22,000 roles were added in January, and economists expect a weaker report. The Employment Cost Index also showed a weak increase in compensation costs, suggesting little dynamism in the market. This weaker outlook has had a knock-on impact on the rates environment, with investors pricing in more Fed easing in 2026.
According to Deutsche Bank’s Henry Allen, the releases helped to validate the dovish arguments pushing for more rate cuts this year. 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.”
This weaker outlook has a knock-on effect on the rates environment, with investors pricing in more Fed easing in 2026. CME’s FedWatch barometer priced a 25 basis point cut at the next meeting in March with a 37% probability. 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 +3.3bps on the day to 60bps.
This story was originally featured on Fortune.com
Author: Evan Null
