While the breaking news regarding the Fed receiving subpoenas from the Department of Justice will no doubt garner the lion’s share of Fed-related headlines in the days and weeks ahead, we wanted to roll the clock back and delve into what the markets should be looking at in terms of upcoming traditional monetary policy decisions.

When expectations all seem to be heading in one direction, sometimes it is interesting to step outside of that echo chamber and think about other possibilities. On the trading floor, the term would be ‘taking the other side of the trade.’ So, with that in mind, here’s a rhetorical question for you all. What is one of the main areas of ‘market agreement’ for 2026? The answer: two more Fed rate cuts.

Now, this issue of Minds on the Markets is not going to necessarily make a specific ‘Fed call’, but rather it is intended to make investors contemplate how more rate cuts may not be what actually transpires over the next eleven months. Although the Fed has two mandates, employment and inflation, that help to dictate policy decisions, there is no question that Powell & Co. did not give them equal footing going back to the beginning of this current rate cut cycle. In other words, employment was number 1, and inflation was, at best, 1A.

That priority system remains in place at the present time, and it makes the monthly jobs reports rather important, not just for the Fed, but the markets as well. Unfortunately, the government shutdown caused a bit of a foggy labor market picture over the last few months, even with the resumption of monthly Employment Situation reports. That is why the latest jobs release for December was so important…it was the first set of data that finally brought back some semblance of normalcy for analyzing the underlying statistics.

Typically, the lion’s share of attention is turned to the nonfarm payroll part of the report, or the level of new job creation. What is interesting is that the resumption of rate cuts in September was predicated on the shift in nonfarm payroll trends. What initially was thought to be a solid backdrop abruptly changed to visible cooling in new hiring activity after notable downward revisions to prior months’ data. Now, it appears that the focus shifted more towards the unemployment rate as 2025 ended and the new year got underway.

Let’s fast forward to the present where an interesting development has occurred. In the original November jobs report, the unemployment rate rose unexpectedly to 4.6%, representing a +0.5 percentage points increase since June. Needless to say, this heightened fears that the cooling pace of new hiring may be now beginning to show through into potential layoffs. As a result, additional rate cuts were penciled in for 2026. However, the latest employment report revealed two key developments: the first being that the November 4.6% jobless rate was revised down to 4.5%, and secondly, the December figure dropped to 4.4%.

This is the opposite of the aforementioned nonfarm payroll dynamic, and begs the question: what if payroll growth remains modest and the unemployment rate stays somewhat flattish in the months ahead? In other words, the ‘worst’ of the labor market cooling is now behind us. The markets saw this phenomenon play out a year ago and the Fed went ‘on hold’ for nine months. Given the fact the policymakers have already cut rates by an additional 75 basis points, the urgency for further easing could be removed.

The bar has certainly been raised for a January rate cut. In addition, is it possible to consider the possibility the Fed won’t cut rates at all in 2026? At a minimum, the markets may be looking at the fact that the current rate cycle is nearing its end.