Everyday Economics: Has the labor market cooled enough to justify more cuts?

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(The Center Square) – This week is light on major economic releases and heavy on Federal Reserve speeches. That shifts the spotlight to the question markets actually care about right now:

Has the labor market cooled enough to justify additional rate cuts, even though inflation – and inflation expectations – remain closer to 3% than 2%?

The latest inflation data argues for caution. At the same time, trade policy is back in the headlines: after the Supreme Court struck down the administration’s prior tariff program, the President responded by reinstating a temporary 10% global tariff (under Section 122 authority), adding a fresh dose of uncertainty to the inflation outlook and the growth path.

Inflation moved the wrong way at year-end

The Fed’s preferred inflation gauge firmed in December:

• Headline PCE inflation rose to 2.9% year over year in December, up from 2.82% in November. 

• Prices rose 0.4% month over month in December, up from 0.2% in November. 

• Core PCE (excluding food and energy) also increased 0.4% m/m and is running around 3.0% y/y – still meaningfully above the Fed’s 2% goal. 

That doesn’t mean inflation is re-accelerating permanently. But it does mean the Fed lacks a clean “all clear” signal – and it makes the case for cutting based purely on labor-market cooling harder to defend. 

A 'balanced Taylor rule' suggests policy isn’t obviously too tight

One way economists translate inflation and labor-market data into a policy-rate benchmark is the Taylor rule, a simple formula that links the recommended short-term interest rate to:

• how far inflation is from the central bank’s target, and

• how much slack exists in the labor market.

A balanced Taylor rule typically puts similar weight on inflation and economic slack. It matters because it offers a transparent, back-of-the-envelope way to ask: Is the current fed funds rate far above what the economy “needs,” or broadly in the right neighborhood?

Using late-2025 conditions, a balanced Taylor-style framework pointed to a policy rate around the mid-3% range when inflation was cooler and labor slack had widened. But December moved the wrong way for cuts: inflation firmed while the unemployment rate edged lower. In plain English, that combination pushes the implied policy rate up, meaning the inflation/labor mix at year-end raises the threshold for future cuts rather than lowering it. 

Labor market cooling: yes—but the composition is a warning sign

At first glance, the unemployment rate has drifted lower. But it’s happening alongside a labor-supply story that is changing too. Recent research and official estimates suggest immigration flows have cooled sharply, which can reduce labor force growth even as demand slows. 

More importantly, the “low-hire” dynamics are becoming harder to ignore:

• Job openings have fallen to about 6.5 million (December), while the number of unemployed/job seekers is about 7.5 million. That’s a meaningful reversal from the post-pandemic period when openings far exceeded job seekers. 

• Hiring is also narrow in breadth. Job growth has increasingly been concentrated in a handful of sectors – health care and social assistance in particular – while other sectors are flat or down. 

That mix – openings below job seekers plus concentrated hiring – is exactly the kind of labor-market cooling that can look “fine” in the unemployment rate until it suddenly isn’t.

What Fed officials are likely to emphasize this week

With the data giving mixed signals, Fed speeches become the story because they reveal which risk policymakers are prioritizing.

• Christopher Waller (Fed governor): has argued that tariff-driven price increases can be treated as temporary and not over-weighted in policy decisions, saying the Fed can “look through” those effects when expectations are anchored. 

• Lisa Cook (Fed governor): has emphasized that risks remain skewed toward inflation staying too high and that she wants stronger evidence inflation is on a sustainable path back to target. 

• Austan Goolsbee (Chicago Fed): has said additional cuts are possible, but conditional on inflation clearly moving back toward 2%. 

• Raphael Bostic (Atlanta Fed): has pointed to stronger growth as a reason inflation pressures could persist, strengthening the case for patience on cuts. 

• Tom Barkin (Richmond Fed): has framed the policy challenge as risks on both sides of the mandate – protecting the labor market without letting inflation expectations become embedded. 

• Jeff Schmid (Kansas City Fed): has argued it’s too soon to rely on productivity improvements (including from AI) to solve inflation, implying policy should remain restrictive until inflation clearly cools. 

The data that matter this week

Case-Shiller home price index: Zillow’s data already pointed to cooling

Home-price growth cooled into the end of 2025, and Zillow’s home value index and market reporting offered a useful preview of what Case-Shiller is likely to confirm for December. Zillow noted December was notably soft – home values failed to rise month-over-month in any of the 50 largest metros. 

Moderating price growth is good news for future homebuyers. Even though affordability remains stretched, the direction has improved: income growth outpaced home-price growth in 2025, and the combination of flatter prices and lower mortgage rates has made affordability less restrictive heading into spring. 

Producer price inflation: the pipeline check

After December’s firmer PCE report, this week’s PPI release matters because it helps answer whether upstream price pressures are building again or whether December was a bump. 

Construction spending: strong overall, but nonresidential is doing the lifting

Construction spending has been supported by nonresidential activity, including investment tied to the AI buildout. Residential construction, by contrast, has remained subdued: builders are cautious when homes take longer to sell and concessions pressure profit margins – and the forward pipeline softened, with 2025 permits down 3.6% from 2024. 

Bottom line

The Fed is trying to thread a needle. Inflation remains closer to 3% than 2%, and December’s PCE print moved higher, not lower. At the same time, the labor market is cooling in ways that don’t show up cleanly in the unemployment rate: job openings are now below job seekers, and hiring is narrowly concentrated – a classic “low-hire” warning sign. 

That’s why speeches dominate this week: they will signal whether policymakers think labor-market cooling is sufficient to keep cutting or whether inflation’s stubbornness (and trade uncertainty) keeps the Fed in “hold and verify” mode a little longer.