Will the Fed be forced to cut interest rates to 2.25%? Wall Street prophets: Unemployment rate could soar to 6% this year!

David Rosenberg, former chief North American economist at Merrill Lynch Securities, known as the "Wall Street Prophet", recently stated that the US economy is facing serious challenges in 2026. The employment market may undergo severe contraction, weakening economic prospects and forcing the Federal Reserve to take dramatic and aggressive interest rate cuts. In an interview, Rosenberg said, "The biggest surprise (this year) will be people realizing that the labor market is not cooling down, but shrinking." Currently, the US unemployment rate has risen from 4% at the beginning of last year to 4.6% in November. Rosenberg predicts that the unemployment rate will soon surpass 5% and is likely to test the 6% level by the end of the year. Despite the long government shutdown in 2025 leading to gaps in official economic data, Rosenberg believes that the labor market reports clearly indicate cracks are emerging. A recent report showed that the layoff rate in the US rose to 1.2% in October last year, the highest level in a year. While still at a relatively low level, it indicates that the bottom has been reached and the trend is upward. Rosenberg pointed out that the layoff trend is on a mild upward trajectory. At the same time, he stated that the hiring rate is plummeting like a hot knife through butter. The Conference Board's Consumer Confidence Survey includes a "Labor Market Differential Index" measuring consumers' perception of the abundance or scarcity of job opportunities. The index dropped to 5.9 in December, the lowest since the peak of the COVID-19 pandemic in February 2021. Rosenberg posted on the X-platform, "When you compare the JOLTS recruitment/layoff rate with the Conference Board's 'employment abundance/job difficulty' data series, the future picture presented is: unless these indicators reverse, the unemployment rate is likely to test the 6% level." Many on Wall Street believe the recent weakness in labor market indicators may reverse due to the stimulus measures from the tax plan passed last July, which will take effect this month. However, Rosenberg believes that these tax refunds from the IRS will only provide a temporary surge in consumer spending by "borrowing from the future." With consumers seeing wage growth slow down, overall spending will shrink. Therefore, Rosenberg's current view is sharply different from the consensus among Wall Street economists the latter predicts that the US labor market will remain stable, and the Federal Reserve will cut interest rates once or twice in 2026. The median forecast from Federal Reserve officials' dot plot expects one rate cut this year. However, the Federal Reserve has emphasized the downside risks in the labor market. The latest staff forecast report from the Federal Reserve states, "The slowing labor market conditions and increased economic uncertainty have elevated the risk of economic weakness beyond expectations." Will the Federal Reserve be forced to cut rates to 2.25%? Rosenberg believes that the collapse of the labor market and the subsequent economic recession will force the Federal Reserve to make a substantial cut of 125 basis points to 2.25% by the end of this year. "The driving force behind the Federal Reserve's rate decision is not political factors, nor who will become the Fed chair whether it's Kevin Hassett, Kevin Warsh, or Kevin Costner (a movie star)," he quipped. "Data is the DRIVE behind the Fed's decisions." So, if the wave of layoffs continues to spread, why are the current US unemployment claims still at low levels? Rosenberg pointed out that one reason may be that the employment decline mainly impacts the white-collar workers who can receive severance pay when they leave. "They usually wait to apply for unemployment benefits after the severance pay runs out," he explained. As for the strong 4.3% GDP growth in the US in the third quarter of last year Rosenberg scoffed at this data, calling it a "complete illusion." He believes that a more reliable indicator is personal income adjusted for government transfer payments adjusted for inflation, this indicator has remained flat in the past two quarters. Trump's tariff policy masked the truth of weak income growth: while the sharp decline in imports boosted GDP and consumer spending, it came at the cost of a significant decrease in the savings rate. Rosenberg also stated that he is not currently concerned about inflation despite the inflation rate being above the Federal Reserve's 2% target for almost five years. He pointed out that as Trump's tariff policy reaches its peak and housing prices continue to soften, prices will stabilize. He predicts that inflation a year from now and the increase in core prices will reach or fall below the Federal Reserve's target. While many economists attribute the weak US labor market to supply factors, Rosenberg believes this view is mistaken. "The truth is always reflected in prices, and the rate of labor price growth is slowing down," he said. "Therefore, I believe the hawks and bond bears are both wrong." This article is reprinted from "Cai Lin She". Editor: Zhang Jinliang.