Fed's Waller: It is possible the labor market has pivoted to a more solid footing after a weak 2025

Fed's Waller: It is possible the labor market has pivoted to a more solid footing after a weak 2025

Fed’s Waller: Labor Market Weakness Persists Despite Signs of Stabilization

Federal Reserve Governor Christopher J. Waller has emphasized that the U.S. labor market remains fragile despite recent signs of stabilization, citing weak job growth and structural challenges as key concerns. In a January 30, 2026, statement, Waller reiterated his dissent from the Federal Open Market Committee’s (FOMC) recent decision to hold rates steady, arguing that further rate cuts are necessary to address ongoing labor market weakness.

Payroll growth in 2025 was exceptionally weak, with total job creation falling to just under 600,000—a stark contrast to the 10-year average of 1.9 million annually. Revisions to 2025 data are expected to show "virtually no growth" in payroll employment, underscoring a labor market struggling with both supply and demand-side challenges. Employers have adopted a "no hire, no fire" approach, with planned layoffs in 2026 signaling lingering uncertainty about economic conditions.

While Waller acknowledges that inflation, excluding tariff effects, is nearing the FOMC's 2% target, he argues that monetary policy remains overly restrictive. The current policy rate, 50–75 basis points above the estimated neutral rate of 3%, continues to weigh on economic activity. "With a weak labor market and inflation on track to meet our goal, the policy rate should be closer to neutral," he stated.

Recent data, including a slight decline in the unemployment rate to 4.4% in December 2025 and reduced long-term unemployment, suggest some stabilization. However, Waller cautions that these trends may mask underlying fragility. Private-sector job creation metrics, such as ADP payroll data, indicate continued weakness, with average monthly job gains of only 27,000 from May to August 2025. Structural factors—including demographic shifts, reduced immigration, and uneven demand across industries— further complicate recovery efforts.

Waller advocates for cautious, incremental rate cuts to support labor demand while monitoring inflation risks. "Something's got to give—either the labor market rebounds to match GDP growth, or growth pulls back," he noted, highlighting the tension between strong economic output and weak hiring. With the Fed's preferred inflation measure (PCE) projected to fall to 2.5% by year-end, policymakers face a delicate balancing act between fostering employment and maintaining price stability.

For now, the labor market remains in transition, with upcoming data and policy decisions critical to shaping its trajectory.