US Federal Reserve Could Pause Rate Cuts, But Not Finished Yet

ing the anticipated effect of the benchmark revision). The unemployment rate averaged 4.5% in the past three months, up from 4.1% in the first quarter of 2025. Powell noted that the conventional wisdom is that when data on the labor market and GDP conflict, the labor figures are often proved correct by subsequent data and revisions. Still, it’s possible that a productivity boom, in conjunction with falling labor supply from reduced immigration, is creating an environment wherein job growth is weak even as the economy grows at a solid rate.

As long as the risk of recession remains low, and insofar as further slack doesn’t accumulate in the labor market (i.e. rising unemployment), the Fed won’t be in a hurry to further cut rates. But by year end, we expect the Fed will have cut interest rates two more times. The Fed’s pause in cutting rates gives it the opportunity to carefully monitor the impact of recent rate reductions on the economy. Financial markets predict an additional 0.5 percentage point rate cut this year, after which rates are expected to stabilize in 2027.

While the prospects for the US economy in the near future are positive, as reflected in stronger retail sales data for September and October, ongoing labor market data signals weakness. The recent decrease in nonfarm payroll employment by approximately 0.4% per year in the last three months of December, coupled with a rise in the unemployment rate from 4.1% to 4.5% in the first quarter of 2025, presents a contrasting narrative to the overall economic growth. Powell highlighted that historically, when data on labor market indicators and GDP contradict each other, subsequent revisions tend to affirm the accuracy of labor metrics. However, the current scenario could be influenced by a surge in productivity along with diminishing labor supply due to reduced immigration, causing growth in jobs to lag significantly behind economic expansion.

Given the low probability of a recession and as long as the labor market does not worsen, the Fed’s focus won’t be on immediate rate cuts. However, by the end of the year, it is anticipated that the Fed will implement two additional rate cuts. The Fed’s decision to pause and observe the impact of recent rate adjustments signifies a cautious approach in response to the economic landscape. With expectations for a further 0.5 percentage point reduction in rates this year, followed by a stabilization in 2027, the Fed aims to ensure a balanced approach to managing economic growth and employment stability.