• Kevin Hassett argues the unemployment rate should come down, signaling a dovish stance on monetary policy.
  • The Federal Reserve has cut rates three times in 2025, but internal divisions are deepening over 2026 easing.
  • Markets price in more cuts than the Fed projects, with Hassett's potential appointment seen as accelerating this trend.

Kevin Hassett, the former Trump economic adviser now in contention for a Federal Reserve role, told reporters this week that the unemployment rate should come down, a remark that underscores the growing debate over how aggressively the central bank should ease policy in response to a cooling labor market. His comments come as recent data show very weak job creation—about 4,750 jobs per week on a four-week average—too little to materially lower unemployment, according to analysts familiar with the matter.

Fed officials have acknowledged the labor market's slowdown, with unemployment edging up into the mid-4% range and payroll growth slowing sharply. Some labor-market data are also being revised down, with Fed Chair Jerome Powell noting a systematic overstatement of job growth in earlier Bureau of Labor Statistics estimates. This backdrop has fueled internal FOMC divisions over how many cuts are appropriate in 2026, with projections ranging from almost no further cuts to several additional reductions.

Hassett, who served as Chair of the Council of Economic Advisers in the Trump administration, has argued there is room to cut rates further, emphasizing labor-market softness and downshifting inflation. His stance aligns with market expectations, which price in a federal funds rate near 3% by end-2026, implying four to six more 25-basis-point cuts versus the Fed's official guidance of only about two cuts. Prediction markets assign a high probability to his appointment, raising concerns among some analysts about political pressure on the Fed and potential erosion of its independence.

Without more aggressive easing, the economy could face prolonged weak job gains, but critics warn that overly dovish moves might re-ignite inflation. Efforts to balance these risks have hit a snag as inflation has eased from its peak, with some analyses warning more about deflation risk than overheating, citing falling home prices, excess rental supply, and lower energy prices. Fed projections see unemployment rising to about 4.5% by end-2025 and only edging down afterward, indicating acceptance of a somewhat weaker labor market.

In a brief phone call, a spokesperson for Hassett declined to comment further on his remarks, but people close to the discussions say he views the current environment as justifying a steeper rate-cut path. The December cut, which brought the federal funds rate to roughly 3.5–3.75%, was framed more as downside insurance than aggressive stimulus, reflecting the cautious tone among some policymakers.

As the debate unfolds, workers face slower hiring and gradual unemployment increases, heightening risks of prolonged job searches. Borrowers, meanwhile, could benefit from lower rates, easing debt service and supporting investment. If Hassett's pro-cut stance prevails, it might support job growth and bring unemployment down, as he suggests, but at the risk of re-accelerating inflation if wage and price pressures persist. Conversely, a more cautious Fed could keep inflation subdued but prolong a period of weak job gains.

This situation echoes past episodes, such as the early 2000s, when the Fed cut rates into a soft but not yet recessionary labor market, debating whether to prioritize employment or inflation risks. Today, with growth projected below the long-run trend, the stakes are high for policymakers navigating these trade-offs. A low-hiring/low-firing environment has emerged, suggesting firms are cautious but not yet engaging in mass layoffs, adding another layer of complexity to the outlook.

International spillovers from additional U.S. rate cuts could affect global capital flows, exchange rates, and borrowing costs, though current commentary focuses mainly on domestic labor-market and inflation trade-offs. In parallel, other economies like the U.K. are seeing labor-market cooling with easing wage growth, providing a case study in balancing disinflation against labor-market softness.

Looking ahead, the short-term baseline suggests only modest additional easing in 2026, with unemployment around the mid-4% range. But if Hassett or similarly dovish voices gain more influence, the rate-cut path could steepen, aligning more with market expectations. The long-term implications hinge on whether faster cuts support job growth without rekindling inflation, a delicate balance that will shape the economic landscape into 2026 and beyond.