Labor Market Fragility, Cooling Inflation, and Fed Rate Outlook

Weekly Economic Review: Dec 12, 2025

This week’s economic data includes: (1) Job Openings and Labor Turnover
Survey (JOLTS) for October, (2) the December Federal Open Market Committee (FOMC) meeting, and (3) weekly initial jobless and continuing claims.

KEY SUMMARY:

October’s JOLTS data shows a cooling labor market, with job openings slightly higher but hires down, layoffs up, and quits at their lowest level since 2020, signaling reduced worker confidence.

Job openings edged up by 12,000 in October to 7.67 million, slightly above September’s level and well above market expectations of 7.12 million, remaining higher than the pre-pandemic average. Gains in retail trade, wholesale trade, health care, and transportation were offset by declines in professional and business services, finance, and accommodation and food services. Regionally, openings rose in the South and West but fell in the Northeast and Midwest.

Hiring activity weakened, with hires dropping by 218,000 to 5.15 million, while layoffs rose by 73,000 to 1.85 million, pushing the layoff rate to 1.2%. Voluntary quits fell sharply by 187,000 to 2.94 million – the lowest since August 2020 – signaling reduced worker confidence in their ability to find new positions. Overall, the data suggests a cooling labor market with ongoing sectoral and regional disparities.

The Fed delivered a dovish 25-bp rate cut to 3.50%–3.75%, although signaling a potential pause despite labor market weakness and moderating inflation. It also announced approximately $40B in Treasury bill purchases per month to maintain liquidity, and projected stronger growth, lower inflation, and one 25-bp rate cut in 2026 followed by another in 2027.

The FOMC voted 9–3 to cut its benchmark interest rate by 25 basis points to a target range of 3.50%–3.75%, marking the third cut this year for a total of 75 basis points. The split vote—the first since 2019—underscored policy divisions, with Governor Stephen Miran favoring a deeper 50-bp cut and two regional presidents preferring no change. This disagreement highlights challenges in reaching consensus ahead of a leadership transition, as President Trump is expected to nominate a successor to Chair Powell when his term ends in May.

In its statement, the Fed cited moderate economic growth, slowing job gains, rising unemployment, and still-elevated inflation. To address downside risks to employment, the Fed opted to ease policy while signaling a potential pause, noting that future adjustments will depend on incoming data and the balance of risks. Powell reinforced this stance in his press conference, emphasizing labor market weakness, projecting tariff-driven inflation to peak in early 2026, and expressing optimism that AI-driven productivity gains will eventually support jobs and incomes despite limited current impact. The Fed’s updated Summary of Economic Projections (SEP) points to stronger growth and lower inflation in 2026, with officials expecting only one 25-bp cut in 2026 and another in 2027—somewhat more hawkish than market pricing. GDP growth is projected to rise to 2.3% in 2026, un-employment to ease to 4.2% by 2027, and inflation to decline to 2.4% in 2026 and 2.0% by 2028.

On liquidity, the Fed ended quantitative tightening on December 1, citing money market stress from heavy Treasury issuance and elevated short-term rates. To maintain ample reserves, it will pur-chase about $40 billion in Treasury bills per month starting December 12, in addition to reinvesting agency security principal payments. These reserve management purchases aim to stabilize fund-ing markets and act as a “shadow rate cut,” reducing pressure for further policy easing in early 2026. The last time the Fed conducted such operations was in October 2019 to calm repo market volatility.

Initial jobless claims surged to 236,000, the largest weekly increase since 2021 and above expectations, while continuing claims fell, reflecting holiday-related volatility but overall labor market stability.

Initial jobless claims jumped by 44,000 to 236,000 for the week ending December 6, the largest weekly increase since July 2021 and above expectations of 220,000, though seasonal volatility around the holidays likely contributed to the spike. The four-week moving average edged up slightly to 216,750, suggesting overall labor market stability. Continuing claims fell by 99,000 to 1.838 million for the prior week, below forecasts, with the four-week average also declining to 1.918 million, reflecting holiday-related fluctuations.
 

Equity markets ended the week mixed as record highs early on were erased by a tech-led sell-off, while Treasury yields steepened and investors priced in two rate cuts for 2026 amid the Fed’s dovish stance.

Equity markets ended mixed for the week. Record highs in the Dow and S&P 500 on Thursday, driven by the Fed’s rate cut and dovish outlook, were offset by Friday’s sharp tech sell-off. AI-related stocks, pressured by cost and profitability concerns after negative news from Broadcom and Oracle, dragged down the S&P 500 and Nasdaq, while cyclical and value sectors outperformed.

Treasury yields steepened with short-term rates falling and long-term rates rising, driven by the Fed’s rate cut, plans to purchase Treasury bills for liquidity, and a stronger growth outlook. Markets have priced in two additional 25-basis-point cuts in April and September 2026, lowering the federal funds up-per bound to 3.25%, while 2027 remains uncertain with only a 63% probability of a July move.

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DETAILED ANALYSIS:
JOLTS – October Update:

The Bureau of Labor Statistics (BLS) reported a modest increase of 12,000 job openings in Octo-ber, bringing the total to 7.67 million, up from 7.66 million in September. This figure exceeded mar-ket expectations of 7.12 million and remains above the pre-pandemic average of 7.15 million. On a year-over-year basis, job openings rose by 55,000.

Monthly gains were driven by:
• Retail Trade: +142,000
• Wholesale Trade: +52,000
• Health Care & Social Assistance: +49,000
• Transportation, Warehousing & Utilities: +44,000

Offset by declines in:
• Professional & Business Services: -114,000
• Finance & Insurance: -69,000
• Accommodation & Food Services: -33,000
• Information: -30,000
• Federal Government: -25,000

Regionally, the Northeast and Midwest saw declines, while the South and West posted gains.

Hires fell by 218,000 to 5.15 million, down from 5.37 million in September, largely due to:
• Health Care & Social Assistance: -95,000
• Professional & Business Services: -79,000
• Accommodation & Food Services: -47,000
• Construction: -42,000

Partially offset by:
• Other Services: +58,000
• Transportation, Warehousing & Utilities: +24,000

No region reported a gain in hires. On an annual basis, hires declined by 201,000.

Layoffs increased by 73,000 to 1.85 million in October, up from 1.78 million in September. On an annual basis, layoffs increased by 66,000, driven by:
• Accommodation & Food Services: +130,000
• State Government: +23,000

Offset by decreases in:
• Construction: -68,000
• Real Estate & Rental and Leasing: -11,000

The layoffs rate went up to 1.2% in October from 1.1% in September. Layoffs rose in all regions except the West.

Voluntary resignations (quits) fell by 187,000 to 2.94 million in October, marking the lowest level since August 2020 and coming in below expectations of 3.15 million. Year-over-year, quits declined by 276,000. The quits rate dropped to 1.8% from 2.0%, likely reflecting reduced worker confidence in finding new employment.

December 9-10 FOMC Meeting:

FOMC Decision
The FOMC voted 9–3 to lower its benchmark interest rate by 25 basis points, setting a new target range of 3.50%–3.75%. This marks the third rate cut of the year, totaling 75 basis points. Three of-ficials dissented—on both ends of the policy spectrum—the first time this has occurred since 2019. Governor Stephen Miran again favored a 50-basis-point cut, while two regional Fed presi-dents, Jeff Schmid (Kansas City) and Austan Goolsbee (Chicago), preferred to keep rates un-changed. The wide disagreement underscores the challenge of building consensus within a poli-cymaking body facing a leadership transition, as President Trump is expected to nominate a suc-cessor to Chair Powell when Powell’s term expires in May.

Fed Statement Highlights
The Fed noted that while economic activity is expanding at a moderate pace, job gains have slowed, unemployment has edged higher, and inflation remains somewhat elevated. Balancing its dual mandate of full employment and price stability, the Fed opted to lower rates to address rising downside risks to employment. The statement added language used in the past to signal a poten-tial pause, noting that the “extent and timing” of future adjustments will depend on incoming data, the evolving outlook, and the balance of risks.

Powell’s Press Conference
Chair Powell emphasized labor market weakness, estimating job gains at roughly negative 20,000 per month. He projected tariff-induced inflation to peak in Q1 2026 and decline over the following nine months, assuming no major new tariff developments. Powell also remarked that the economy has not reached the productivity boom of the 1990s and suggested that while AI may be contrib-uting to labor market softness, its impact remains limited for now. He expressed optimism that AI-driven productivity gains will ultimately create jobs and boost incomes.
Summary of Economic Projections (SEP)
The Fed’s updated SEP projects stronger growth and lower inflation in 2026. Key takeaways:
1. Interest Rate Projections (Dot Plot)
• Median expectation: one 25-bp cut in 2026 and another in 2027 (totaling 50 bps), lower-ing the target range to 3.25%–3.50% in 2026 and 3.00%–3.25% in 2027—slightly more hawkish than market expectations of two cuts in 2026.
• Year-end median forecasts:
• 2025: 3.6% (unchanged)
• 2026: 3.4% (unchanged)
• 2027: 3.1% (unchanged)
• 2028: 3.1% (unchanged)
• Long-run neutral rate: 3.0%
2. GDP Growth
• 2025: 1.7% (up from 1.6%)
• 2026: 2.3% (up from 1.8%)
• 2027: 2.0% (up from 1.9%)
• 2028: 1.9% (up from 1.8%)
• Long-run growth rate: 1.8%
3. Unemployment Rate
• 2025: 4.5% (unchanged)
• 2026: 4.4% (unchanged)
• 2027: 4.2% (down from 4.3%)
• 2028: 4.2% (unchanged)
• Long-run estimate: 4.2%
4. Inflation (Headline PCE)
• 2025: 2.9% (down from 3.1%)
• 2026: 2.4% (down from 2.6%)
• 2027: 2.1% (unchanged)
• 2028: 2.0% (unchanged)
• Long-run target: 2.0%

Balance Sheet and Liquidity Actions
As announced in its October meeting, the Fed ended quantitative tightening (QT) on December 1, citing stress in money markets since mid-October, driven by high demand for the Standing Repo Facility (SRF) and elevated short-term rates. Increased Treasury bill issuance combined with QT had drained liquidity, pushing short-term rates higher and threatening policy rate control. The Fed intervened through SRF to stabilize overnight repo rates within the target range, which also low-ered the Secured Overnight Financing Rate (SOFR) rate.

In its December meeting, the Fed announced that reserve balances have declined to ample levels and will maintain sufficient reserves by purchasing approximately $40 billion in Treasury bills start-ing December 12. These reserve management purchases (RFP) aim to support market function-ing and liquidity, not signal a return to quantitative easing. The RFP is in addition to the T-bills the Fed will purchase in the secondary market as part of its plan to reinvest all principal payments from its agency securities. This effectively acts as a “shadow rate cut” by easing funding pres-sures, reducing the likelihood of another policy cut early in 2026. The last time the Fed conducted its RFP was in October 2019 to stabilize money markets after a cash crunch caused overnight lending rates (repo rates) to spike in September.

Jobless Claims – Week Ending December 6:

The Labor Department reported that initial jobless claims rose sharply by 44,000 to 236,000 for the week ending December 6, up from 192,000 the prior week (revised from 191,000). This exceeded market expectations of 220,000. The weekly increase was the largest since July 16, 2021 (55,000). These swings appear to reflect seasonal volatility, as claims typically fluctuate around the holidays and are likely to remain choppy through year-end. The four-week moving average, which smooths out seasonal variations, edged up to 216,750—an increase of 2,000 from the pre-vious week—indicating overall stability in labor market conditions.

Continuing claims, which measure the total number of individuals receiving unemployment benefits and are reported with a one-week lag, fell to 1.838 million for the week ending November 29, down 99,000 from 1.937 million (revised from 1.939 million) the prior week—below expectations of 1.938 million. Similar to initial claims, Thanksgiving week data was volatile. The four-week moving aver-age also declined to 1.918 million from 1.945 million.

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MARKET ANALYSIS:

Equity Market Weekly Recap
Equity markets ended the week with mixed results. While some indexes hit record highs earlier in the week, a sharp decline on Friday left growth-oriented benchmarks slightly lower, even as cycli-cal and value sectors outperformed. On Thursday, both the Dow Jones Industrial Average and the S&P 500 reached record highs following the Fed’s rate cut announcement and dovish expectations for stronger economic growth and lower inflation. However, markets retreated as AI-related and technology stocks sold off, weighed down by concerns over the high costs and uncertain profita-bility of artificial intelligence investments, following negative news from Broadcom and Oracle, which dragged down the S&P 500 and Nasdaq.

Weekly and Year-To-Date (YTD) Performance Highlights:
• Nasdaq: -1.62% (weekly) & +22.12% (YTD), closing at 23,195
• S&P 500: -0.63% (weekly) & +16.08% (YTD), ending at 6,827
• Dow Jones Industrial Average: +1.05% (weekly) & +13.90% (YTD), closing at 48,458
• Russell 2000: +1.19% (weekly) & +14.41% (YTD), ending at 2,551

Treasury Market Update
Treasury yields showed a mixed pattern and a steeper curve, with short-term yields (under three years) declining and longer-term yields rising:
• 2-year yield: 3.52% (-0.04%)
• 5-year yield: 3.75% (+0.03%)
• 10-year yield: 4.19% (+0.05%)

Key drivers of this movement included:
• The Fed’s decision to cut interest rates by 25 basis points, lowering the federal funds target range to 3.50%-3.75%
• The Fed’s announcement of reserve management purchases of Treasury bills to improve liquidity, influencing the short end of the curve
• The Fed’s stronger growth outlook, pushing long-term yields higher

Rate Cut Expectations
Looking ahead to 2026 and 2027, markets have fully priced in two 25-basis-point cuts—expected in April and September 2026—while no cut is anticipated for 2027, with a 63% probability (essen-tially a coin toss) of a move in July. These adjustments would lower the federal funds rate upper bound to 3.25%, down from the current 3.75%.

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NEXT WEEK’S ECONOMIC CALENDAR:
Key scheduled releases include:
• 12/16 (Tuesday):
o Nonfarm Payrolls and Unemployment Rate (November)
o Retail Sales (October)
• 12/18 (Thursday):
o Weekly Initial and Continuing Jobless Claims
o CPI (November)
• 12/19 (Friday):
o Existing Home Sales (November)

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For a visual representation of this week’s economic review, you can view or download the slide deck here:12.19.2025 CBC Weekly Economic Update Slides

Mark Yoon, CFA CPA

EVP & CFO of Commercial Bank of California

Thomas McCullough

EVP of Commercial Bank of California

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