New research suggests the Fed may be wrong to cut rates

By Brett Arends

A report from the Dallas Fed indicates that conventional wisdom about the jobs market is misguided - because it doesn't take into account changes in immigration

Stephen Miran, President Trump's newest appointee to the Federal Reserve's board, is pushing for deeper, faster rate cuts

The Federal Reserve Board - as well as most major economists - may be seriously wrong about the jobs market, according to a new report from the Federal Reserve Bank of Dallas.

The research warns that the Fed and other experts may be misreading what's really going on in the labor economy. And if the report is right, it means the central bank could be making a serious mistake by slashing interest rates too fast and too soon while inflation is still elevated.

Maybe this explains why the interest rate on 10-year Treasury notes BX:TMUBMUSD10Y is actually higher today than it was just before the Fed cut short-term interest rates last month. And why the price of gold (GC00), ominously, has risen $300 an ounce since the Fed's cut, taking it above $4,000 an ounce for the first time.

Both moves are what you'd expect if investors were getting more jittery about inflation.

The Fed cut short-term rates by a quarter of a percentage point last month to 4% to 4.25%, and the market expects it to cut twice more this year. Several board members, including John Williams, Mary Daly and Chris Waller, have signaled that they want to cut rates even further. President Donald Trump wants the Fed to slash rates aggressively. So does his latest Fed appointee, Stephen Miran.

Their argument: The U.S. jobs market is slowing alarmingly, and so they need to cut short-term rates to boost the economy - even though inflation is well above Fed targets and showing few signs that it's about to die.

But the fresh analysis from the Dallas Fed says this conventional wisdom about the jobs market is wrong, because it doesn't take into account the impact of the Trump administration's huge crackdown on illegal immigration. This includes the effect on the labor market of at least 300,000 immigrants who have "self-deported" since the new administration took office. It also includes all those forcibly deported. And it reflects a big turnaround from a couple of years ago, when a large number of immigrants were coming into the country.

Bottom line, says Dallas Fed economist Anton Cheremukhin, is that the U.S. economy now needs to create far fewer jobs each month in order to absorb all the new workers and keep unemployment down.

"A dramatic reversal in immigration flows, combined with cyclical shifts in labor-force participation, has caused the monthly breakeven requirement to collapse from a peak of approximately 250,000 in 2023 to about 30,000 in mid-2025," he wrote.

"This means modest payroll gains, which might have seemed alarming in 2023, are now indicative of a stable and balanced market," he added.

The unemployment rate, not the monthly payroll figures, are now a much better indicator of the health of the labor market, Cheremukhin said.

The Dallas Fed's research is based on a fresh independent look at real-time economic data, including, for example, government numbers on border crossings.

If this is correct, the Fed's move to cut short-term interest rates last month may prove a mistake, and so might further cuts.

Fed Chair Jerome Powell has already admitted that the administration's campaign to purge the U.S. of those here unlawfully may be a key factor in the declining payroll numbers. This is among the reasons Powell has been resisting pressure from the White House to cut rates prematurely.

It is notable that inflation is still persistently above the Fed's 2% target. The most recent headline number was 2.9%, but this is an out-of-date figure, because it compares recent prices with those a year ago. If you want to look at what is happening to prices at the moment, you have to look at the more recent numbers; according to the Bureau of Labor Statistics, prices between July and August rose 0.4%, which means an annualized rate of 4.9%.

In normal circumstances, a Fed faced with such price pressures wouldn't even think about cutting short-term rates. They have done so for only two reasons. The first is the sharp slowdown to the monthly payroll numbers, including big downward revisions to previous months' numbers. The second is the enormous pressure coming from the White House, where Donald Trump has already tried to fire one Fed governor and has publicly threatened to fire Fed chairman Jerome Powell for resisting rate cuts.

Trump fired the head of the Bureau of Labor Statistics in August (publicly insulting her in the process, of course) over the downward jobs revisions for recent months. The research from the Dallas Fed suggests that those, too, might be the result of the unintended consequences of his own administration's policies.

-Brett Arends

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10-10-25 1410ET