Federal Reserve officials who earlier this year had been highly worried about labor-market weakness - a concern that supported calls from many for interest rate cuts - will see that view put to the test with Friday’s U.S. jobs update. Economists surveyed by Reuters anticipate that employers added 85,000 positions in May, down from April’s unexpectedly strong 115,000 but still consistent with the unemployment rate remaining at about 4.3%.
The report arrives against a backdrop in which monthly hiring averaged fewer than 10,000 jobs through 2025, a period when employment growth was eroded by uncertainty tied to import tariff policy, an administration tightening of immigration enforcement, and a cautious economic outlook. Hiring picked up somewhat in 2026’s first four months, averaging 76,000 new jobs per month. While that pace would have been seen as lackluster in earlier years, the combination of immigration-related constraints and other headwinds has meant it was sufficient to keep the unemployment rate largely steady.
That steady but subdued pattern in payrolls has helped shift the balance of policymakers’ thinking away from expecting rate cuts and toward a heightened priority on reducing inflation. Fed Governor Christopher Waller has been explicit about that change in emphasis. In recent remarks he said he can no longer rule out the possibility of further rate increases later on if inflation does not ease quickly, marking a departure from his prior stance when he supported cuts in 2025 and continued to advocate for them into early 2026 while he was under consideration for the central bank’s top job.
"Recent jobs data show that the labor market appears to be stabilizing and the unemployment rate is fairly low and stable," Waller said, reflecting his revised judgment that the risks posed by elevated inflation now outweigh earlier concerns about labor-market weakness.
That line of reasoning has gained traction at the Fed in recent weeks. Barring a significant downside surprise either in the payrolls report or in the consumer-price data scheduled for release on June 10, Kevin Warsh may confront a policy dilemma when the Federal Open Market Committee meets on June 16-17. Warsh, who assumed the chair after Jerome Powell left in mid-May, had argued in the run-up to his nomination that interest rates could decline over time because President Donald Trump’s policy agenda and advances in artificial intelligence would lift productivity and growth while easing inflation pressures.
But the incoming economic signals have not aligned with that expectation. Inflation remains about a percentage point or more above the Fed’s 2% target and appears on track for a sixth straight year averaging above that level. The persistence of elevated price pressures has prompted growing concern among Warsh’s colleagues that the central bank’s credibility could be at risk if policy is perceived as too permissive.
Outside observers have also revised their timelines for a return to target inflation. The International Monetary Fund, for example, now projects that inflation will not reach the Fed’s 2% goal until the end of 2027 rather than the middle of next year, a delay the IMF attributes in part to the macroeconomic effects stemming from the U.S.-backed war with Iran. "So we’ve now delayed a bit further the return to target," IMF spokesperson Julie Kozack said, adding that upside risks to inflation imply the Fed will need to move cautiously and calibrate policy carefully to incoming data.
Signs of a tilt toward tighter policy were visible at the Fed’s April 28-29 meeting, when three policymakers dissented in favor of shifting the bank’s stance in a more hawkish direction - opening the door to a rate hike as the next move rather than a cut. Waller has said he now agrees with that approach, and other officials have begun to speak more openly about the possible need for tighter policy, counter to expectations from President Trump that rates would fall under Warsh’s leadership.
Market pricing reflects an increased chance of higher rates next year. Investors are pricing in a rate hike in early 2027 with odds roughly split that the FOMC will act at its December 8-9 meeting, according to CME Group’s FedWatch tool.
Commentators have noted that recent Fed commentary has signaled "a reduced focus on labor market risks and a much heavier emphasis on inflation," with the prospect of rate hikes later this year even if inflation simply remains at current levels rather than accelerating, Capital Economics’ Stephen Brown wrote in a note. For Warsh, an open question remains whether his public tone will be less dovish than it was while he pursued the nomination.
The broader political and economic context makes the policy debate particularly sensitive. President Trump anticipates lower rates under Warsh, some Fed colleagues are urging a more hawkish stance, and the U.S. midterm elections in November could hinge in part on how economic conditions develop.
Some of the enduring inflationary pressure can be traced to the ongoing war with Iran, now in its fourth month and linked to an oil shock that has reverberated through costs across the economy. While benchmark crude prices have eased recently, maritime traffic through the strategic Strait of Hormuz remains impeded and no settlement has been reached to end the conflict.
Economic reports from the Fed’s 12 regional districts released on Wednesday painted a picture of businesses and community contacts still grappling with the prolonged effects of the oil-price surge. Executives reported passing higher input costs - for items such as fertilizer, shipping, and metals - onto consumers, suggesting that the initial energy shock has seeded wider price increases.
At the same time, employment appears to be holding up, even as many firms adopt a cautious "low-hire, low-fire" posture. That approach keeps payrolls positive but at a muted pace. "The big question now is do we stay patient?" Kansas City Fed President Jeffrey Schmid asked at an economic forum in Oklahoma. His comments highlighted the central dilemma: recent inflation readings that he estimated have probably crept into the mid-3% range present an uncomfortable trade-off. "Is it temporary ... Or do we act? Do we say, 'okay, now it’s time to raise rates a quarter (of a percentage point) or two and see if we can’t tamp this thing down?'"
What to watch this week
- The May payrolls report and the June 10 inflation release - either could shift the balance of opinion about the next policy move.
- Whether incoming data reinforce a narrative of a stabilizing labor market that allows the Fed to focus primarily on inflation containment.
- Comments from Fed officials ahead of the June 16-17 meeting that may reveal whether Warsh will telegraph a more hawkish posture and how colleagues respond to that stance.