Recent economic data indicates that employment conditions are gradually replacing inflation as the key factor in determining the Federal Reserve's monetary policy direction. The focus of the discussion is no longer whether employment will slow down, but whether this slowdown will evolve into a true recession.

Former Merrill Lynch chief analyst David Rosenberg has recently issued a warning signal. He believes the unemployment rate could break through the 5% threshold and even approach 6%. This is not a mild adjustment but a level often accompanied by large-scale layoffs, causing systemic impacts on consumption and investment. Once the labor market falls into this range, the economy's own momentum will significantly weaken, and the likelihood of the Fed being forced to adjust its policies will greatly increase.

Looking at the policy changes over the past year or so, this shift is actually traceable. When the Fed started cutting interest rates in September 2024, Powell described it as a preventive measure, claiming the labor market remained stable. By 2025, employment data began to look less optimistic: new job opportunities shrank noticeably, the unemployment rate started to rise, and previous data was being revised downward. Taken together, these signals can no longer be dismissed as short-term fluctuations.

For this reason, there has been an increasing divergence between market expectations and the Fed's own dot plot. Officially, the Fed says there might only be room for one rate cut in 2026, but many research institutions expect that if employment continues to worsen, more frequent easing measures could be seen in the first half of 2026. The core of this disagreement is fundamentally about different assessments of employment risk weighting.

Powell mentioned at this year's Jackson Hole meeting that the risk balance has shifted, which also foreshadows a policy turn. Historically, whenever employment data deteriorates persistently, the Fed tends to prioritize stabilizing the economy. Therefore, Rosenberg's prediction of a potential significant rate cut is less an isolated pessimistic forecast and more a logical deduction based on current trends. The final answer will depend on what the upcoming employment reports reveal.