How U.S. Job Cuts Are Pushing the Fed Towards an Interest Rate Cut

In the U.S., job cuts in 2025 are hitting pandemic-level highs, with over 1.17 million layoffs announced already—54% more than last year. The latest ADP and Challenger, Gray & Christmas reports revealed a surprising weakness in the U.S. labor market, especially among small businesses, even as large employers still added jobs. But this labor data isn’t just a grim headline—it’s reshaping expectations for the Federal Reserve's interest rate policy. Wall Street now sees a near 90% chance that the Fed will cut rates in December, betting that layoffs will tip the delicate balance the Fed maintains between inflation and employment.

“A weaker labor market boosts easing prospects despite sticky inflation,” as UBS Global Wealth Management’s CIO Mark Haefele put it.

Challenging the 'Strong Labor, Hawkish Fed' Narrative

The prevailing notion is that a steady 4% unemployment rate signals a resilient economy, which justifies the Fed's reluctance to cut rates aggressively. But this view misses the nuance between unemployment headline rates and the underlying labor market shifting beneath the surface. The unusual surge in layoffs—from 761K in the first 11 months of 2024 to over 1.17M in 2025—is reshaping the labor supply dynamics that underpin hiring costs and inflation pressures.

This subtle but critical disconnect is why analysts expect the Fed’s January guidance to reflect division within the Federal Open Market Committee, where some members will push for 50 basis point cuts, others for a hold, and the majority leaning toward a 25 basis point reduction. This division contrasts sharply with market consensus expecting a cut, illustrating a constraint repositioning at the heart of U.S. monetary policy. For context, compare this to how other central banks maintain strict hawkish stances despite weaker employment data, prioritizing inflation control over easing.

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Small Business Layoffs and Labor Supply Constraints

The ADP report’s spotlight on small businesses axing nearly 120,000 jobs exposes a key mechanism the Fed is watching: the erosion of a shrinking talent pool. With immigration curtailed and a wave of retirements, the U.S. labor market supply is unusually tight. This imbalance means small shifts in employment—especially among firms with under 50 employees—carry amplified weight on economic momentum.

Meanwhile, large companies with 500+ employees added 39,000 jobs. This divergence reveals how capital-rich firms with operational leverage are absorbing talent while smaller businesses shed labor, creating a nuanced labor market that conventional unemployment metrics fail to capture. That nuance influences the Fed’s dilemma in balancing inflation above target and preventing broader economic slowdown.

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Why Inflation Moderation Doesn’t Block Rate Cuts

Inflation remains about 1 percentage point above the Fed’s 2% target, but the trajectory matters more. The ISM Prices Paid Index slid to 65.4 in November from 70 in October, its lowest in seven months. The Fed’s preferred measure, the personal consumption expenditure index, is set to confirm that inflation pressures aren’t intensifying further. This gives the Fed cover to pivot toward easing without losing hawkish credibility.

History shows the Fed avoids surprising with hawkish moves when market expectations strongly lean toward cuts, reducing volatility. Yet, internal committee fractures suggest a new constraint: Powell must balance market expectations shaped by history against conflicting internal economics signals. As Bank of America economists point out, Powell may try a hawkish tone in his press conference but ultimately bow to easing pressures.

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What This Means for Investors and Policymakers

The unexpected surge in layoffs is the constraint reshaping the Fed’s path: the labor market is weaker than headline unemployment suggests, forcing complicated judgments on policy. Investors betting on cheaper money are gaining structural leverage as rate cuts would lower financing costs without the immediate need for economic recovery precision. This dynamic fuels rallies even amid grim labor conditions.

Operators and strategists should watch how shifts in labor supply constraints, especially small business layoffs, ripple through cost structures and inflation expectations. The Fed’s balancing act creates leverage opportunities for companies capable of navigating capital availability amid uncertainty. Other economies with tight labor supply and inflation pressures could see similar monetary pivots, shifting global capital flows.

“Market expectations now hinge more on labor market shifts than headline inflation — a paradigm shift for monetary leverage.”

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Frequently Asked Questions

How many job cuts were announced in the U.S. in 2025?

Over 1.17 million layoffs were announced in the U.S. in 2025, which is 54% more than the layoffs reported in the previous year.

Why are job cuts influencing the Federal Reserve's interest rate policy?

The surge in job cuts signals a weakening labor market that could reduce inflation pressures, increasing the likelihood of the Fed cutting interest rates to stimulate the economy.

What is the current market expectation for the Fed's interest rate moves?

Wall Street currently sees nearly a 90% chance that the Federal Reserve will cut interest rates in December 2025 due to increasing layoffs and labor market weakness.

How do small business layoffs affect the overall labor market?

Small businesses have cut nearly 120,000 jobs in 2025, which impacts the shrinking talent pool and labor supply constraints more heavily than large firms that continue to add jobs.

What is the significance of inflation trends in the Fed's decision-making?

Although inflation remains about 1 percentage point above the Fed's 2% target, recent declines in key indexes suggest inflation pressures are moderating, giving the Fed room to consider easing monetary policy.

Are large companies also cutting jobs like small businesses?

No, large companies with over 500 employees added 39,000 jobs in 2025, showing a divergence in how different business sizes are impacting employment.

What internal divisions exist within the Federal Open Market Committee regarding interest rates?

The committee shows division with some members advocating for a 50 basis point cut, some for holding rates steady, and the majority leaning toward a 25 basis point reduction, reflecting uncertainty about the labor market impact.