Fed Eyes Rate Cuts as U.S. Labor Market Cools — Markets Digest Mixed Signals

The Federal Reserve is increasingly evaluating the case for interest rate cuts as evidence grows that the U.S. labor market is losing momentum, a shift that could influence monetary policy later this year. At its recent meeting, the Fed held its benchmark rate at 3.50 %–3.75 %, keeping policy on hold while monitoring economic developments. Markets and strategists continue to price in expectations for future easing, partly driven by softer hiring trends and signs of labor market fragility.

San Francisco Fed President Mary Daly highlighted that although the labor force remains generally healthy, conditions feel “precarious,” and there may have been a case to ease policy sooner given slowing job growth and rising unemployment claims. Daly’s comments have reinforced speculation that cutting rates could become appropriate if labor market weakness persists.

Other policymakers remain cautious, prioritizing inflation control, but the cooling labor data — including reduced job openings and slower wage gains — has shifted the debate toward a more dovish stance. Some projections now see the Fed implementing multiple reductions later in 2026 if job conditions continue to soften and inflation pressures ease toward the central bank’s 2 % target.

Market Implication: Investors are adjusting portfolios in anticipation of potential rate cuts, which could support equities and lower borrowing costs but may also signal slower economic momentum ahead.