The Fed Is Flying Blind — and Today’s Jobs Shock Just Flipped the December Rate-Cut Script

The return of U.S. economic data after the 44-day government shutdown could not have come at a more delicate moment for the Federal Reserve. Markets were already on edge following Wednesday’s release of the Fed minutes , which revealed a sharply divided committee and cast real uncertainty over the December 10 meeting. Overnight, the CME FedWatch tool pegged the odds of a December rate cut at just 27%—well below the historical threshold at which the Fed has acted. In fact, the central bank has never cut rates with odds below 60%, reinforcing the idea that the most important takeaway from the minutes wasn’t the cut delivered in October, but the lack of consensus for anything that comes next.

Into this fog stepped the September BLS jobs report , the first major data release since the shutdown. And for once in 2025, the macro gods delivered a number that was simultaneously better than expected and low-drama. Nonfarm payrolls rose +119,000—more than double the consensus estimate of +50,000—and private payrolls increased +97,000. Manufacturing shed fewer jobs than feared, while the workweek held steady at 34.2 hours. Average hourly earnings cooled slightly on a month-over-month basis (+0.2% vs. +0.3% expected), but the year-on-year measure held at a still-firm 3.8%. The unemployment rate ticked up a tenth to 4.4%, but that came alongside a decline in the number of people who “want a job,” indicating a softer labor churn rather than broad deterioration.

In short: a labor market that is cooling without cracking.

Under normal conditions, this is exactly the type of data the Fed would want to see. Wage pressure is manageable, job growth is healthy enough to avoid recession fears, and the uptick in the unemployment rate remains consistent with a soft-landing narrative. The strong gains in healthcare (+43k), food services (+37k), and social assistance (+14k) underscore ongoing resilience in service-oriented areas of the economy. Retail hiring also improved—an encouraging setup as we head into the critical holiday spending period.

This matters because the shutdown has forced the Fed to fly partially blind. As the minutes openly acknowledged, several policymakers were uncomfortable adjusting policy without a clear read on the labor market or inflation. Powell described it as “driving in the fog,” while Governor Waller gently disputed that characterization, arguing the Fed had enough data to act. The minutes showed an extraordinary degree of divergence: “many” members thought additional cuts were unnecessary for the remainder of the year, “several” would have preferred no cut in October at all, and a lone member (Miran) even pushed for a more aggressive 50-basis-point reduction.

For a committee that typically guards consensus like a family heirloom, the split tone was striking.

The market reaction said it all. Treasury yields drifted lower after the jobs report, with the 10-year slipping to 4.11%. Jobless claims came in better than expected. The VIX fell to 20.12, extending its post-jobs decline. Traders modestly increased their bets on additional easing—but crucially, not in December. Instead, expectations shifted toward January and March, consistent with the minutes’ indication that most participants still see a path toward further cuts, just on a slower timetable.

Layered into this macro backdrop is what continues to be a complicated inflation picture. The Philadelphia Fed’s November survey showed a sharp rise in prices paid (56.1 vs. 49.2), and the prior day’s Fed minutes stressed that inflation has “shown little sign of returning sustainably” to 2%. That tension—sticky inflation vs. softening labor data—sits at the core of the December debate.

But from a market perspective, the stronger September jobs number should ease the worst fears about a stalling economy. For retailers in particular, the backdrop is improving at exactly the right moment. Seasonally, November and December drive a disproportionate share of discretionary spending. A steady labor market means stable consumer confidence, even if the unemployment rate is slightly above last year’s levels. Recent retail earnings have flagged tariff-driven price increases, but nothing in the report indicates weakening demand that would threaten holiday sales.

Which brings us to the real policy question ahead: should the Fed cut in December?

The argument for cutting hinges on caution about the labor market. Some Fed officials worry that a further slowdown—for example, if the holiday hiring season disappoints—could cause job softness to snowball. The argument against cutting focuses on inflation that is still too warm and the risk that an early cut could undermine the Fed’s credibility just as inflation expectations have stabilized.

For markets, the calculus is different. A December cut followed by hawkish messaging—“one and done,” or worse, “don’t expect more”—would carry a meaningful risk of tightening financial conditions through volatility, not easing them. The best outcome would be no move in December accompanied by a dovish, forward-looking message that acknowledges improving labor trends, commits to data dependency, and lays out the conditions under which cuts will resume in early 2026.

Markets don’t just react to what the Fed does. They react to what the Fed telegraphs.

The September payrolls report gives the Fed breathing room. Inflation is still too high for comfort, but the labor market is not weakening fast enough to force the Fed’s hand. With two more jobs reports due on December 17—after the FOMC concludes—it would be strategically unwise to cut just days before receiving critical new data. A steady-hand approach seems the path of least resistance.

For now, the story is simple: the economy is holding up, the Fed is split, and the market would rather hear a calm, unified message in December than get a preemptive cut that immediately raises questions about what comes next.