Supreme Court Deadline Looms: Tariff Ruling and a Stagnant Labor Market Constrain Fed Policy

The Federal Reserve now faces a dual pressure that will dictate its next moves. On one side is a labor market in a stubborn low-hire, low-fire equilibrium. On the other is an imminent macroeconomic shock from a Supreme Court ruling on tariffs. This setup leaves the central bank with limited room to maneuver, likely forcing a cautious rate cut but severely hampering its ability to pivot decisively.

The latest jobs report underscores the structural stagnation. In December, employers added just 50,000 jobs, with the unemployment rate falling slightly to 4.4%. That pace is far below the 2024 average monthly gain of 168,000. In fact, there wasn't a single month in all of 2025 where job creation exceeded that 2024 average. The result is a year of employment growth that has been the weakest since 2009 outside of the pandemic, with total payrolls rising a meager 0.4% instead of the 1.3% that would have been expected at a more robust pace. This isn't a cyclical dip; it's a sign of a labor market in a prolonged, uneven equilibrium, with concentrated growth in healthcare and social assistance offset by losses elsewhere, leaving many job seekers sidelined.

The labor market reality is mirrored in the Fed's own internal divisions. The central bank's recent decision to cut rates was a 9-3 dissenting vote, its third consecutive meeting with such a split. The three "no" votes signal deep concern among hawks about inflation, while the dissenters, including a governor who wanted a steeper cut, prioritize supporting a labor market that is clearly not firing on all cylinders. This internal conflict reveals the Fed's dilemma: it must balance inflation control against a labor market that is not generating enough jobs to absorb new entrants or reduce long-term unemployment, which rose by nearly 400,000 in 2025.

The looming Supreme Court ruling on tariffs adds a layer of macroeconomic uncertainty that further constrains the Fed. A decision that upends trade policy could introduce significant volatility to inflation and growth forecasts, making any forward guidance risky. In this environment, the Fed's cautious path is logical. It has signaled a tough road ahead, with its "dot plot" projecting only one more cut in 2026. Yet the structural weakness in the labor market and the pending tariff shock mean the central bank's ability to use monetary policy as a decisive tool is fundamentally hampered. Its next move will likely be another incremental cut, but the broader policy pivot it might wish to make is blocked by these twin constraints.

The Tariff Ruling Catalyst: A $150 Billion Wildcard

The Supreme Court's imminent decision on the legality of Trump-era tariffs is not just a legal question; it is a potential macroeconomic catalyst that interacts directly with the Fed's constrained policy path. With a ruling expected as early as this Friday, the outcome could trigger a refund of up to $150 billion in duties already paid by importers. That scale alone introduces a massive, unforeseen fiscal and trade policy shock, regardless of the court's verdict.

The uncertainty is the immediate problem. The justices' skepticism during oral arguments last November has raised the odds that the court will strike down the tariffs, but the administration has vowed to fight and has legal fallbacks. This creates a volatile setup where the Fed's outlook is complicated by a potential policy reversal of historic proportions. The central bank is already navigating a labor market in stagnation; a sudden shift in trade policy and a flood of potential refunds would inject significant volatility into inflation and growth forecasts, making any forward guidance risky.

The timeline for implementation adds a near-term pressure point. A new electronic refund system, mandated by a Trump executive order, will go live on February 6. Importers must register by then to receive payments electronically, a deadline that creates a clear, short window for action. This system, while designed to streamline payments, also underscores the logistical complexity of a refund process that could involve hundreds of thousands of businesses. As one executive noted, the process could easily become a "dog's breakfast." The Fed must factor in the potential for this administrative chaos to spill over into broader economic instability.

The bottom line is that this ruling is a major wildcard. It represents a potential $150 billion fiscal transfer that could boost consumer spending and business cash flows if refunds are distributed smoothly. Yet the uncertainty surrounding the legal and administrative process, coupled with the administration's stated intent to continue tariffs under other authorities, means the net impact on trade and inflation is far from clear. For the Fed, this is a classic case of a policy shock that limits its own options. It cannot afford to cut rates aggressively if a tariff ruling could simultaneously ease trade costs and introduce a new wave of fiscal uncertainty. The central bank's cautious, incremental path is the only prudent response to a catalyst that could reshape the economic landscape in a matter of days.

Forward Guidance and Market Pricing

The market's cautious stance reflects a Fed that is managing risk, not chasing data. Despite the weak labor market, expectations for a December rate cut remain subdued. As of late October, the CME FedWatch Tool priced the odds of a quarter-point reduction at just about a 35% chance. That figure, while up slightly from prior sessions, underscores a disconnect between the soft employment data and market pricing. The Fed's own internal divisions highlight why.

The central bank's recent decision to cut rates was a 9-3 dissenting vote, its third consecutive meeting with such a split. The three "no" votes signal deep concern among hawks about inflation, while the dissenters, including a governor who wanted a steeper cut, prioritize supporting a labor market that is clearly not firing on all cylinders. This internal conflict reveals the Fed's dilemma: it must balance inflation control against a labor market that is not generating enough jobs to absorb new entrants or reduce long-term unemployment.

The Fed's stated "risk-management approach" suggests it will wait for clearer signals before committing to further easing. The committee's statement following its last meeting emphasized that it would carefully assess incoming data, the evolving outlook, and the balance of risks. This language, repurposed from a year ago, has historically signaled a pause. The committee's own projections, as shown in its "dot plot," reflect this caution, with officials expecting only one more cut in 2026. In other words, the Fed is not ruling out further easing, but it is demanding more evidence of a sustained shift in the labor market's trajectory before acting.

The bottom line is that the market is pricing in the Fed's caution. The low odds for a December cut are a direct translation of the central bank's risk-averse posture. The Fed is not ignoring the soft labor data; it is treating it as part of a broader, uncertain picture. With a Supreme Court tariff ruling looming and inflation still somewhat elevated, the committee's priority is to avoid a policy misstep. This means incremental, data-dependent moves, not a decisive pivot. For now, that approach is keeping the market on a leash.

Catalysts, Scenarios, and Key Watchpoints

The constrained policy environment outlined earlier will be tested by a series of near-term catalysts and evolving data. The primary event is the Supreme Court ruling, expected imminently. Its outcome will be a binary shock: a strike-down of the tariffs could trigger a flood of refunds, while a defense would validate the policy but likely prolong the legal and administrative uncertainty. Either way, the market's reaction will be immediate and significant, testing the Fed's stated commitment to a "risk-management approach."

For the Fed, the key watchpoint is its own language. The committee's recent statement repurposed language from a year ago that historically signaled a pause. If, in its next communications, the Fed explicitly shifts its balance of risks assessment-perhaps downgrading the "downside risks to employment" or acknowledging that the tariff shock has altered the outlook-it would signal a change in stance. Until then, the cautious, data-dependent posture is likely to persist.

The most persistent risk, however, is the hardening of internal divisions. The 9-3 dissenting vote on the recent rate cut is a clear warning. With a governor who wanted a steeper cut and two regional presidents voting against any change, the committee's unity is fraying. If this split hardens into a prolonged stalemate, it could lead to a period of policy uncertainty that dampens business investment and consumer spending. The Fed's own projections show this risk: the "dot plot" indicates that seven officials want no cuts next year, while the median expectation is for just one more cut in 2026.

In practice, this means the Fed's next move is likely to be another incremental cut, but the broader path is blocked. The Supreme Court ruling introduces a massive, unforeseen fiscal and trade policy shock, while the internal divisions limit the central bank's ability to respond decisively. The market's low odds for a December cut reflect this reality. The bottom line is that the constrained policy environment is not a temporary condition but a structural setup where external catalysts and internal conflict combine to limit the Fed's toolkit. Investors should watch the court's decision, the Fed's balance of risks language, and the persistence of its internal splits as the key signals that will determine whether the central bank can navigate this complex landscape.