The Federal Reserve’s Open Market Committee cut 50 bps from its target interest rate this week, turning the page on its inflation fight with eyes towards staving off downside labor market risks.

Forecasters and investors were notably uncertain on the size of the cut ahead of the decision, with some suggesting that a larger 50bp move would indicate mounting concerns of labor market weakness. Chair Jay Powell instead reiterated that the “decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained.” Larger 50bp cuts are not the new normal, but the initial move affirmed the Fed’s commitment to not falling behind.

This brief looks at where the US labor market stands upon the September rate cut. While victory cannot be declared, we ask: what does a soft landing look like?

Trusted Insights for What’s Ahead™:

• The Fed’s decision to cut rates by the larger 50bps indicates officials’ commitment to support the “strength in the labor market” by ensuring that downside risks do not materialize as layoffs and unemployment claims currently remain minimal.
• Today’s labor market is on more solid footing relative to the starting places of past rate cutting cycles.
• Re-entrants and new job seekers make up 50% of the current rise in unemployment, diverging from prior periods that resulted in recession.
• US demographics are weighing on labor force growth, with retirements now making up the entirety of the increase in the those not in the labor force since the pandemic.
• Aligning with Fed policymakers, we view the US labor market entering into early 2025 largely holding steady, as the lowering of interest rates and the end of election uncertainties create a clearer picture for businesses of the economic path ahead.

Table 1. Labor market indicators healthy in comparison to prior initial rate cuts

Is This Time Different?

The Fed’s decision to cut 50bps instead of 25bps acknowledges that the labor market has held up stronger than initially expected and that a further slowdown in business activity and hiring could jeopardize the economy’s strength.

The recent softening in the labor market has been the type of normalization that the Fed has been explicitly targeting. Unemployment at 4.2% has risen slightly but from a 55-year low in 2023, while layoffs remain minimal as firms continue holding onto workers. Consistent with the Fed’s objective, job openings have come down from their peak and now stand within 100,000 of the pre-pandemic high. Hiring has slowed from a blistering pace to healthy in 2024, however recent hiring and payroll data have caused concern.

Despite recent wariness around hiring and unemployment, the current labor market is on more solid footing than in past episodes. Table 1 compares the current labor market with those at the start of past rate cutting cycles. In each past case, continued claims for unemployment insurance had already reached the 2 million mark. Job gains had already slowed more substantially at the time of cuts in 2001 and 2007, while the unemployment rates were higher during the 1980s and 1990s episodes.

Taking a step back—labor market trends appear consistent so far with a “soft landing” narrative. Over the past 6 months the economy has added jobs at a pace nearly identical to 2019. The labor market today has 8.7 million more jobs than its pre-Covid peak and the share of prime-aged US workers that are employed is at a level not seen since 2001. Fed officials expect unemployment to peak at 4.4% before holding steady into 2025. Wage pressures continue to moderate while inflation is quickly approaching the Fed’s target range. Against this backdrop, the Fed’s larger 50bp rate cut bolstered the likelihood of success.

How Worrying is Unemployment?

Despite rising unemployment, joblessness remained below earlier forecasts and is not at a level that warrants standalone concern. The unemployment rate of 4.2% in August has risen steadily, but from a historic low of 3.4% in April 2023. Figure 1 shows that prior forecasts, including the Congressional Budget Office’s early 2023 estimate, anticipated that unemployment would rise rapidly due to hiring failing to keep pace with labor market growth. Instead, unemployment has ticked up at a measured pace, consistent with the Fed’s goal of normalization towards the “neutral rate of unemployment” (roughly 4.4%).

Figure 1. Uptick in Unemployment invites concern yet remains low

Only in recent months has the slowdown in hiring reached a point that poses a risk to maintaining unemployment at its mild level. Evident in Powell’s comments, concerns over stalled hiring led the FOMC to raise its median unemployment forecast for 4Q 2024 to 4.4% from 4.0% in June estimates. However, despite the unemployment rate’s rise, other measures like layoffs and unemployment claims bolster evidence that weakness is not spreading such that slow hiring will lead to rising unemployment.

Composition of Unemployment Mitigates Concern

Labor market re-entrants and new job seekers are contributing a greater share to the current rise in unemployment than in past cases. Figure 2 shows that since unemployment began rising in early 2023, exactly 50% of the increase has come from new labor market entrants and individuals re-entering the workforce. Compared to past cycles since 1975, through 16-months from the unemployment lowpoint the combination of market entrants had never exceeded the 28% reached in October 2008.

Figure 2. Labor force growth driving unemployment

As opposed to entrants, unemployment from job loss provides a more significant signal of potential deterioration, given that lost income can lead to pullbacks in spending that translate into businesses contracting further. In the context of the current rise in unemployment, levels of job loss and temporary layoffs remain low. At this point in the 2000-01 cycle, nearly 1.1 million individuals or 63% of all those unemployed had lost jobs compared with only 420,000 through August or 39%.

In the two previous cases, the Fed began lowering interest rates more immediately after overall unemployment began to rise: in September 2007 and January 2001, or 4 and 7 months after each respective lowpoint. In comparison, the current labor market has seen overall unemployment tick up over 16 months amid restrictive monetary policy, but with no recession materializing. The current pace of slowdown fits squarely within the Fed’s objective to lower inflationary pressure through slowing labor demand without inducing layoffs.

Steady Average Weekly Hours Don’t Signal Softening

While a hiring slowdown has begun challenging job seekers, average weekly hours of incumbent employees so far do not reflect broad softening. Overall average weekly hours have declined from their post-pandemic peaks, but remain roughly at 2018-19 levels.

Yet, hours across industries show variation in where softness may be developing. Various measures of manufacturing activity have been in retreat territory for the past two years. That is reflected in average hours for durables manufacturing declining to below pre-pandemic levels. Hours in leisure and hospitality have also fallen, owing entirely to shrinking average hours in food services, while the accommodation and amusement sub-industries show hours more than recovered to pandemic levels. Slight declines in average weekly hours are also impacting retail, education & health services, and information.

However, hours have held steady in the interest-rate sensitive construction sector as a whole. Civil engineering and specialty contractors have benefited from an influx of federal infrastructure investments, while construction hours have fallen in residential construction amid the slowdown in housing. Higher than pre-pandemic hours have been maintained in wholesale trade and professional services. On the whole, hours for production and nonsupervisory workers—which more quickly reflect slowing activity—remain above 2019’s level and have not shown a material falloff in recent months.

Figure 3. Average hours roughly back at prepandemic levels

Aging Population Constraining Labor Force Growth

While the Fed’s decision to reduce the degree of restrictive monetary policy conditions can support business activity and hiring into next year, how much more growth can the labor market achieve? Across metrics, the labor market has more than recovered from the Covid pandemic. Participation for prime-aged men (25-54 years) has recovered to its pre-pandemic level while participation for prime-aged women is at an all-time high, partly assisted by post-pandemic workplace flexibilities. High participation and employment; persistent talent shortages for certain workers; in addition to 8.7 million new jobs added to payrolls since 2019, add evidence to the case that the US labor market sits at near full employment.

Figure 4. Prime-age participation near record highs

Labor force participation is being weighed down by the effects of an aging population. Participation among those aged 65 and older has fallen by a full percentage point since the pandemic amid a wave of retirements. In recent months a small share of these individuals have re-entered the workforce with participation ticking up slightly. However, the impact of the aging workforce is partially offsetting high participation among other US workers.

Retirees now make up the entirety of the not-in-labor-force population since the pandemic (Figure 5). Compared to December 2019, the number of Americans not in the labor force due to retirement has grown by 5.6 million. Those unable to work have also been assisted by workplace flexibilities (i.e., remote work), with 1.6 million fewer outside the labor force than in 2019. While the category of all other non-participants initially spiked during the pandemic, that number slowly normalized as those individuals re-entered the labor force. Over the last 2 months, the entirety of the post-pandemic rise can be attributed to a wave of retirements.

Figure 5. Retirements Weigh Down Number Not in Labor Force