Unlock the Editor’s Digest without spending a dime
Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.
The author is an FT contributing editor and director of financial coverage research on the American Enterprise Institute
Markets, economists and Federal Reserve officers appear to imagine that the US labour market spent most of final 12 months weakening, that inflation is trending again to the Fed’s inflation goal and that the central financial institution will proceed slicing rates of interest in 2026. On every of those three factors, the standard view might be improper.
The holes within the consensus narrative had been clear earlier than final week’s jobs report, which stunned many analysts on the upside. In January, the economic system added 130,000 internet new jobs and the unemployment price declined by 10 foundation factors to 4.28 per cent.
However December’s 4.38 per cent unemployment price was already very low. And the jobless price — which was 4.3 per cent or larger for six months final 12 months — had not been displaying a worrying upward pattern. As well as, the speed at which employers are shedding staff has been flat since 2023. And in keeping with my calculations, mixture labour provide and demand are roughly in balance and have been comparatively steady over the previous 12 months.
Month-to-month headline payroll positive aspects — which trended down all through 2025 — ostensibly inform a special story. However this discount is generally as a result of massive declines in internet migration.
The standard view of labour market weakening has struggled to cope with strong financial progress. Actual GDP grew at annual charges of three.8 per cent and 4.4 per cent within the second and third quarters of final 12 months, respectively, and on the time of this writing is expected by the Atlanta Fed to develop at 3.7 per cent within the fourth quarter. Progress in actual shopper spending and gross mounted funding was sturdy and steady within the center quarters of final 12 months.
Disinflationary stress may appear inconsistent with strong GDP progress and low and steady unemployment. And, contra the standard view of analysts and of the Fed, inflation doesn’t appear to be decelerating. Core PCE inflation grew at a 2.8 per cent annual price in November, the final month for which information is out there. In January 2025, the index grew at precisely the identical annual price.
Furthermore, this lack of progress doesn’t appear to be pushed by the 2025 enhance in tariff charges. Tariffs shouldn’t have a first-order impact on the worth of companies, and my most well-liked measure of underlying service-sector inflation — which depends on noticed market costs and excludes housing and vitality companies — additionally reveals no disinflation in 2025.
To make certain, the standard view of the job market has some empirical help. The speed at which employers are hiring staff is decrease than it has been since 2013. Nonetheless, the danger of inflation accelerating this 12 months is larger than the danger of a spike within the unemployment price.
Tailwinds that can enhance demand and inflationary stress embrace sturdy spending on AI and information centres, rising inventory costs that can gas shopper spending and a fading drag from commerce coverage uncertainty. On the availability aspect, at the least some inflationary stress appears more likely to come from lagged results of final 12 months’s tariff will increase and from reductions within the variety of foreign-born staff.
The federal funds price was 4.33 per cent from January into September. The coverage price at this degree was apparently not excessive sufficient to restrain a rise in inventory costs, stop GDP progress from accelerating, or induce a worrying enhance within the unemployment price. Regardless of this, the Fed reduce its coverage price at its September, October and December conferences.
It might be a mistake for the Fed to chop charges once more in 2026. Although the Fed thinks it has its foot on the economic system’s brake pedal, it’s truly hitting the fuel. Partially due to this, even when the central financial institution retains the coverage price at its present degree, it might want to lift charges within the second half of this 12 months.
As a result of inflation psychology could also be changing into extra fragile, the Fed must be placing extra weight on the inflation aspect of its twin mandate. Households’ medium-term inflation expectations spiked final 12 months and stay elevated. Over the previous 5 years, companies have come to imagine that buyers are extra keen to stay with value will increase than they had been previous to the pandemic. Due to the lengths President Donald Trump has gone to seize the Fed, the upcoming management change has led many to fret concerning the power of its ongoing dedication to its inflation goal.
However first, the Fed — together with buyers and economists — must see extra clearly the power of the economic system.
