The case for rate cuts gets less urgent

Dave Harrison Smith, CFA
Chief Investment Officer
July 14, 2026

 

Last week’s release of the June Federal Reserve meeting minutes highlighted an important shift in the balance of risks in the U.S. economy. As recently as the December meeting, the Committee had succinctly stated that “downside risks to employment had risen in recent months,” reflecting rising concern about a prolonged cooling of the U.S. labor market. Today, the picture has markedly improved. By its June meeting, concerns of deterioration had eased with recent data, allowing policymakers to place greater emphasis on elevated inflation and their commitment to price stability.

The labor market is not booming, but recent data show encouraging stability. Continued unemployment claims have declined from their late-2025 peak, suggesting fewer American workers are relying on unemployment insurance for extended periods. Similarly, monthly nonfarm payrolls have also posted a string of modest gains, with the moving average recovering considerably from its late-2025 weakness.

 

Continued claims have eased from their 2025 peak
Four-week moving average, thousands, seasonally adjusted

 

These gains should be viewed in the context of slower labor-force growth. An aging population and sharply lower net migration mean fewer new jobs are needed each month to keep unemployment stable. Hiring that would have looked weak in prior cycles may therefore be consistent with a balanced labor market today.

Encouragingly, job growth is also broadening across industries. On a three-month moving-average basis, nine of the ten sectors tracked by the private-sector payroll giant ADP added jobs. As recently as late 2025, more than half of the industries were frequently contracting. The education and health services sector remains the workhorse of the U.S. labor market, as it has been for years. But positive job creation in construction, financial activities, leisure and hospitality, and other sectors has made job creation more resilient and less dependent on a single source.

 

Most industries are now adding jobs
Three-month average change in private-sector employment, thousands

 

 

Regional data show a similar rotation in strength. Hiring has improved in the East North Central, New England, and South Atlantic regions, while job growth in the Sun Belt has remained steady. West South Central, which includes Arkansas, Louisiana, Oklahoma, and Texas, has ranked among the strongest regions for much of 2026. The Pacific has shown significant volatility, with growth booms offset by periods of net job loss, coinciding with the early work-from-home days post-pandemic and the widespread tech layoffs in 2023. Most recently, the region surged back near the top of the rankings, likely driven by strong growth in AI-related hiring and investment.

 

Regional job growth leadership continues to rotate
Rank based on three-month average private-sector job growth

 

Overall, the U.S. labor market has improved in recent months, both in the pace of job creation and in the breadth of participation across industries and regions. This aligns with data showing a modest acceleration in the underlying economy. The broader base of support is critical because it makes growth less dependent on AI infrastructure and power investment. It also creates a monetary policy tradeoff: a stable labor market reduces the Federal Reserve’s urgency to lower interest rates, shifting attention back toward inflation, geopolitical uncertainty, and the policy implications of the energy market supply shock.

 

 

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