As Jerome Powell prepares to conclude his tenure as Federal Reserve chair in May, deteriorating economic data may accelerate expectations for additional monetary easing. What had once appeared to be a cautious handover to his successor could now involve more immediate rate cuts, reshaping market assumptions for 2026.
The prospect of Jerome Powell additional rate cuts has gained traction following a series of weaker labor and consumer reports. While policymakers had previously signaled a measured approach, recent data suggests the Federal Open Market Committee may face growing pressure to act before Powell leaves office.
A Labor Market Losing Momentum
The Federal Reserve’s dual mandate requires it to promote maximum employment and stable prices. Inflation pressures have moderated over the past year, shifting attention squarely toward employment dynamics.
The unemployment rate has hovered near 4 percent, a level historically associated with full employment. However, underlying indicators reveal a more fragile picture. The number of new jobs required each month to maintain that unemployment rate has declined steadily, indicating softer labor demand.
Private payroll figures from ADP showed only 22,000 jobs added in January. That marked a sharp slowdown compared with previous years. While wage growth has remained stable, job creation has decelerated consistently over the past three years.
Economists warn that when hiring slows to this extent, even a modest increase in layoffs or a rise in labor force participation could push the unemployment rate higher. Younger workers have borne a disproportionate share of the slowdown, a shift that may alter consumer spending patterns without yet triggering a broad recessionary signal.
The Bureau of Labor Statistics’ Employment Cost Index added further evidence of cooling. Compensation rose just 0.7 percent in the final quarter of 2025, the weakest quarterly gain since mid-2021. Slower wage and benefit growth suggests employers are exercising caution and employees are less inclined to change jobs, a sign of reduced labor market dynamism.
Will Powell Act Before May?
Throughout much of 2025, Powell adopted a wait and see approach, frustrating calls from the White House for aggressive easing. Most economists expected one or two rate reductions in 2026, with the majority occurring under Fed nominee Kevin Warsh, who is expected to succeed Powell.
That timeline may now shift.
Market participants have increased their expectations for earlier easing. According to CME’s FedWatch tool, investors recently assigned a meaningful probability to a 25 basis point cut as soon as March. The perceived likelihood of a move by April, Powell’s final scheduled meeting as chair, has also risen.
Deutsche Bank analysts noted that recent economic releases strengthened arguments for a more dovish stance. Investors have begun pricing in roughly 60 basis points of cuts by the end of the year, reflecting a reassessment of both growth prospects and policy trajectory.
Treasury markets responded accordingly. Two year yields declined to around 3.45 percent, while the 10 year yield fell toward 4.14 percent, signaling expectations of looser financial conditions ahead.
Consumer Spending Adds to the Case
The labor slowdown is not the only source of concern. Retail sales data released by the Commerce Department showed flat performance in December following a 0.6 percent gain in November. Economists had anticipated moderate growth.
Consumer spending has been a critical pillar of economic resilience in recent years. A sustained slowdown would reinforce the argument that demand is cooling enough to justify additional support from monetary policy.
For policymakers, the key question is whether softer data reflects a temporary pause or the early stages of broader economic weakening. Acting too early risks reigniting inflation, while waiting too long could allow labor market deterioration to accelerate.
A Strategic Exit
Powell’s final months as chair now carry heightened significance. Delivering additional rate cuts before departing could help stabilize economic expectations and ease the transition to new leadership.
At the same time, any decision will hinge on incoming data. The Federal Reserve has consistently emphasized that it remains data dependent, a posture that provides flexibility but also underscores uncertainty.
If labor and consumer indicators continue to soften, Jerome Powell additional rate cuts may move from market speculation to policy reality. Such a move would not only shape the near term economic outlook but also influence the strategic framework inherited by the next Fed chair.
For investors and business leaders, the evolving data landscape signals a pivotal period for monetary policy. The coming weeks may determine whether Powell’s legacy includes a final round of easing aimed at cushioning a slowing economy.
