The Federal Reserve made a decisive pivot in 2025, cutting interest rates three times even as inflation stubbornly refused to return to its 2% target. The reason: America’s job market quietly fell apart beneath the surface.
Each cut was 25 basis points, enacted in September, October, and December, bringing the federal funds target range down to roughly 3.5%-3.75%. That’s the lowest level in nearly three years, and it marks a clear signal that the Fed decided job market weakness posed a bigger threat than sticky prices.
The numbers behind the decision
US nonfarm payroll growth averaged just around 49,000 jobs per month in 2025. To put that in perspective, the economy needs roughly 100,000 new jobs monthly just to keep up with population growth. This was the weakest year for job creation since 2020, excluding periods that were technically recessionary.
The deterioration was gradual, then sudden. Monthly payroll gains declined from over 100,000 early in the year to the low tens of thousands, and in some periods dipped into negative territory after revisions. Fed Chair Jerome Powell acknowledged that official job statistics likely overstated actual growth by approximately 60,000 jobs per month, meaning some months that looked like modest gains were actually losses.
Powell indicated that after accounting for these revisions, the job market may have experienced average monthly losses of around 20,000 jobs during certain stretches. Benchmark revisions confirmed what many economists had suspected: the labor market was considerably weaker than headline numbers suggested throughout the year.
Unemployment edged up to 4.3%-4.4% by late 2025, the highest level in four years. The labor market settled into what economists describe as a “low-hire, low-fire” dynamic, where companies weren’t laying people off en masse but also weren’t bringing new workers on board.
Inflation stayed hot, and the Fed cut anyway
The core Personal Consumption Expenditures price index, the Fed’s preferred inflation gauge, averaged about 2.9% in 2025 and remained near 2.8% heading into early 2026. That’s well above the central bank’s 2% target, making these rate cuts a genuinely unusual move.
The FOMC essentially made a judgment call that the labor market was deteriorating fast enough to warrant action, even if prices hadn’t fully cooperated. The Fed chose to prioritize the employment side of its dual mandate, betting that a softer labor market would eventually pull inflation lower on its own.
What comes next
The Fed’s December projections painted a cautious picture for 2026, with officials penciling in just one additional 25 basis point cut. That’s a notable shift from earlier in the year, when markets had priced in a more aggressive easing cycle.