“Let it be, let it be
Let it be, yeah, let it be
Whisper words of wisdom, let it be”
(From “Let it Be” by the Beatles, 1970)
This three-part blog “mini-series” will focus on the Fed – what it looks at and the decisions we think it will make as we move through 2026 and into 2027. In Part I we focus on one of the Fed mandates – the labor market.
By Scott Welch, CIMA®, CEPA®, Chief Investment Officer & Partner
Reviewed by Carter Mecham, CMA®, IACCP®
The April FOMC meeting marked Jerome Powell’s last as Fed Chair, after which he was replaced in May by incoming Chair Kevin Warsh.
So, a new “regime” begins at the Fed, but its mandate remains the same. As a quick reminder, the Fed’s stated dual mandate is to maintain stable prices (i.e., inflation) and optimize the employment environment in the US (i.e., the labor market).
As was widely expected, the Fed did not cut rates in its April meeting. As noted in the published minutes following the meeting [emphasis added]:
Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, on average, and the unemployment rate has been little changed in recent months. Inflation is elevated, in part reflecting the recent increase in global energy prices.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook. The Committee is attentive to the risks to both sides of its dual mandate…
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
The minutes, in general, reinforced the Fed’s conviction to remain “data dependent” when making future rate decisions, but the highlighted sentence above suggests the Fed may be prepared to change its “bias” with respect to easing or hiking rates going forward. Most Fed watchers interpreted this statement to mean that the Fed is prepared to move to a “tightening bias” in future meetings.
As we will examine in this blog, the US labor market appears to be in solid shape. So, any movement toward a tightening bias by the Fed will be based on concerns over rising inflation (which we will address in Part II of this “mini-series”).
Fed Chair Powell elaborated further in his final post-meeting Press Conference [emphasis added].
In the labor market, the unemployment rate was 4.3 percent in March and has changed little in recent months. Job gains have remained low. A good part of the slowing in the pace of the job growth over the past year reflects a decline in the growth of the labor force due to lower immigration and labor force participation, though labor demand has clearly softened as well. Other indicators, including job openings, layoffs, hiring, and nominal wage growth, generally show little change in recent months.
Inflation has moved up recently and is elevated relative to our 2 percent longer-run goal. Estimates based on the consumer price index and other data indicate that total PCE prices rose 3.5 percent over the 12 months ending in March, boosted by the significant rise in global oil prices that has resulted from the conflict in the Middle East…
We will continue to monitor the risks to both sides of our dual mandate. We are well positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, the evolving outlook, and the balance of risks. Monetary policy is not on a preset course, and we will make our decisions on a meeting-by meeting basis.
In other words, the economy and the labor market remain resilient if not robust, but inflation is trending in the wrong direction. This, combined with the ongoing Iranian war translated into it not being an appropriate time to cut rates.
In Part I of this three-part blog series, we examine some of the numbers the Fed “watches” when determining its rate policy. Specifically, the labor market.
Employment Metrics
Unemployment Rates
Let’s begin by looking at the “headline” employment metrics – the U3 unemployment rate and the U6 “partially employed” rate.
Source: The St. Louis Fed (FRED), 5-year data through April 2026. The gap in the chart represents the time when the government was shut down last fall and data were not available.
Here we see the first indication of the resilience of the labor market since the Covid era. Historically, economists considered a 5% unemployment rate as a “fully employed” economy, and we have been below that level since mid-2021.
As another example of a resilient labor market, consider the most recent ADP Private Payroll Report, which indicated that private employers added 122,000 jobs in May, with more than half of the new jobs being added at small companies (less than 50 employees).
Source: ADP Research and The Daily Shot, most recent data for May 2026.
Job Openings, Hires, and Quits Rates
Now let’s look at some of the “numbers behind the numbers,” specifically the job openings, hires, and quits rates. We like to focus on the quits rate, as it is an indicator of workers’ confidence in finding new jobs if they quit the ones they have.
Source: The St. Louis Fed (FRED), 5-year data through March 2026.
What we see is a general decline in job openings, hires and quits, but relative stability over most of the past two years. This suggests the job market may be softening but is holding steady, at least for now.
Recently released data suggest that “job openings” have reached the highest level in almost two years. We can see this reflected in two ways: (1) the recent upturn in the “Job Openings to Unemployed Persons” ratio (first chart), and (2) the corresponding upturn in the “US Jobs to Workers Gap” (second chart).
Source for both charts, The Daily Shot, June 3, 2026.
Jobless Claims
Next, let’s look at jobless claims, both initial and continuing claims. These numbers come out weekly and so are the most contemporaneous of the labor metrics. In other words, these metrics are the most likely to first identify any softening in the labor market.
The weekly numbers can be quite volatile, so we focus on the 4-week moving averages to “smooth out” that weekly volatility. One reason Fed Chair Powell gave for holding rates steady in April was the ongoing resiliency of the labor market, but he also warned that we simply don’t know yet what the inflation and labor market effects will be from the ongoing Iranian conflict and corresponding global oil and other resource shortages. So far, we do not see those effects in the labor numbers, but we will know more as we move through the summer. For now, the claims numbers suggest remarkable stability in the labor market. We remain in a “no fire, no hire” regime, with perhaps some signs of improvement (a declining continuing claims trend).
Source: St. Louis Fed (FRED), as of May 23, 2026.
Remember that the overall unemployment level is measured across all workers. We see a different story than the headline number if we examine the unemployment levels segmented by educational attainment. The cliché saying “Stay in school, kids” actually rings true when it comes to employment.
Source: US Bureau of Labor Statistics, as of March 2026.
Participation Rates
Next, let’s look at the actual participation in the work force – how many people of “working age” are actually working (the Labor Force Participation Rate, or LPR) and what percentage of the overall population is in the workplace (the Employment to Population ratio, or ETP). “Working age” is considered 16 years or older.
Women entered into the “official” workplace in force in the 1970s and 1980s (not that they weren’t working hard domestically before then, but as measured by the Labor Participation rate), but that peak has declined and held steady for most of the past ten years. We see a similar story in the Employment to Population ratio – not out of line with historical levels and stable for most of the past ten years.
When you factor in the reality that “baby boomers” (workers born between 1945-1960) are leaving the workforce at an increasing rate, and ignore the Covid-induced disruption, the stability of both metrics speaks to the ongoing resiliency of the labor market.
We may be beginning to see a slight decline in both metrics – perhaps indicating an increasing rate of retirement and/or an increasing number of people dropping out of the official workforce for other reasons.
Source, St. Louis Fed (FRED), 10-year data as of April 2026.
Wages and Productivity
Finally, let’s look at wages and productivity.
Productivity
As a simplistic but generally accurate comment, an economy can grow by (a) adding more workers and/or (b) increasing the productivity of existing workers.
In other words, strictly from an economic growth perspective, a decline in the employment level can be mitigated if the productivity rate of the remaining workers increases.
We mention this because of the ongoing and accelerating evolution of artificial intelligence (AI). We are still somewhat in the initial stages of the AI revolution, but few people doubt that AI and robotics will eventually replace the need for the same number of workers doing repetitive jobs.
This will be a monumental social challenge, similar to the industrial revolution of the late 1700s to late 1800s and the “tech revolution” of the early 2000s. Workers will be displaced, and it will cause social friction as workers are forced to evolve toward jobs and careers that cater to the new economic reality.
But, in the meantime, and ignoring the Covid-driven disruption, we may be beginning to see an AI-influenced increase in productivity despite a stabilization (and maybe even slight decline) in the number of workers.
Source: St. Louis Fed (FRED), 5-year data through Q1 2026.
Wages
From a wages perspective, we will use a chart that compares wage growth to the headline inflation rate. Wage growth dramatically lower than the inflation rate can drive “wage inflation” as workers demand higher pay to keep up with the price of goods and services.
The other side of that coin is that, even if wages are going up, workers may feel worse off if their pay doesn’t “stretch” as far as it used to. On this front, it is important to remember that inflation spiked at roughly 9% just after Covid, as the Fed kept rates low and massive amounts of fiscal stimulus were injected into the economy.
Why that matters now is because, even if inflation has come down from its Covid peak, those higher prices are “baked in” to current prices. Put differently, even if the Fed achieves its target 2% annualized inflation rate, that growth rate is coming on top of the 9% that we saw a few years ago (and the market will never go back to pre-inflationary prices unless we enter a serious recession / depression).
So, wages matter, even if they have somewhat of a “derivative” effect on the status of the labor market. Here we use the Personal Consumption Expenditure (PCE) index as the measure of inflation, which is the metric the Fed prefers because it accounts for changes in consumer behavior as prices change.
Source: The St. Louis Fed (FRED), 5-year data through Q1 2026.
There are two things to notice: (1) inflation rose significantly faster than wages from 2021 until 2023, after which wages rose faster than inflation, until this year – the trend lines have largely converged.
Translation: many workers – as measured by various consumer sentiment surveys – are not optimistic about the current state of the economy. Further, the longer the Iranian war goes on, and the longer gas and food prices remain elevated, the more pessimistic many workers may become, especially if they fear their jobs may be replaced by AI or robots.
This may have a profound effect on the mid-term elections this November. Ultimately, most voters “vote their pocketbook,” regardless of what the official economic numbers may indicate.
Summary and Conclusions
The purpose of this “mini-series” of blogs is to examine what the Fed looks at in determining its rate policy going forward. As we conclude Part I, we suggest there is nothing currently reflected in the labor markets that would catalyze the Fed to move rates one way or another. At this point, it is all about inflation, which we will tackle in Part II.
We do not anticipate the Fed will do anything in its June or July meetings, though we do believe it may signal an evolving bias toward “tightening” in its June meeting minutes and in Chair Warsh’s first post-meeting press conference.
As always, the Fed remains “data dependent” but, as we interpret the current data, we believe the next Fed move will be a rate hike, but probably not until at least September. And that could change if the Iranian conflict ends quickly (which we have our doubts about) and inflation simmers down.
We know this puts us at odds with President Trump’s desire for lower rates, as well as many well-respected economists who have identified various paths to additional rate cuts, but we just don’t see it in the data yet.
One thing that has not changed is our fundamental investment philosophy:
We continue to recommend diversification at both the asset class and risk factor levels, maintaining portfolio discipline, and maintaining a longer-term time horizon.
Focus on the signals, not the noise.
We hope you find this helpful and, as always, we welcome your feedback and questions.