Fed rate cuts are off the table for now, but could return if labor markets weaken, AI-driven layoffs accelerate, or credit conditions tighten.
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Hello and welcome back to The Weekly Fix. My name is Eric Hathaway, Portfolio Manager with RBC Global Asset Management’s BlueBay Fixed Income Team in Minneapolis, Minnesota. This week, we’re talking about the dramatic shift we’ve seen lately in Fed expectations.
The market has gone from expecting rate cuts to, at least for now, mostly pricing them out. In fact, after the March Fed meeting, traders pared back cut expectations until 2027, even though Fed officials themselves still project one cut in 2026. Looking at markets today there is a higher likelihood of a hike than a cut. This is a remarkable swing from as recently as last month when markets were looking for as many as two cuts this year.
It's worth noting that the main driver of the change has been the war in Iran and the potential for sustained inflationary pressures in the future. But my question today is, if cuts are off the table, what might happen away from the price of oil that could bring easing back to the fore. I think there are three main things:
First, a clearer labor-market break. The jobs market already looks softer than the headlines suggest. The February unemployment report showed nonfarm payrolls actually fell by 92,000 jobs, and prior months were revised lower again – notably December was taken from +48,000 to -17,000. That matters because the Fed can live with a slow labor market, but it gets much harder to stay on hold if soft prints start to become a pattern and unemployment begins to drift higher in a more convincing way. A few more reports like that and the market would start talking about cuts again very quickly.
Second, evidence that AI and corporate efficiency pushes are turning weaker hiring into actual job loss. This is no longer just a long-run thought experiment. We recently saw reports that HSBC is considering cuts that could affect roughly 20,000 roles over several years as part of an AI overhaul. It has also been reported that Meta is preparing for potentially sweeping layoffs as AI costs mount. Economists have estimated that AI may already have accounted for 5-10,000 monthly net job losses last year in the most exposed industries. If that dynamic broadens beyond tech and finance into a wider white-collar slowdown, then AI becomes not just a productivity story, but a macro labor market story, and that would be disinflationary enough to bring cuts back into the conversation.
The third thing we’re watching is stress in private credit and nonbank lending. Even if you’re not convinced the consumer is rolling over, if lenders get more defensive, spreads widen, and refinancing channels start to clog, that tightens financial conditions pretty quickly. At that point the Fed may not need a full recession to start talking about cuts again – it may just need evidence that credit creation is slowing materially.
So, the bottom line is this: the market has priced out cuts because inflation and energy risks are dominating right now. But cuts will come back into focus if we get a more obvious labor market deterioration, AI-driven job displacement that starts to show up in aggregate hiring, or tighter credit conditions for businesses. In other words, the path back to cuts probably runs through a growth scare, not simply better inflation data.
And with that, I’ll thank you for joining me on this edition of the Weekly Fix, where we explore the key topics shaping markets and investments.
Key points
Labor market cracks — February payrolls fell 92,000, prior months revised down, and unemployment could drift higher if weakness becomes a pattern.
AI-driven job losses are becoming real — HSBC and Meta cuts signal AI is moving from productivity story to macro labor story, with potential for broader white-collar slowdown.
Credit stress could force Fed’s hand — Tightening in private credit and nonbank lending could slow credit creation enough to bring cuts back without a full recession.
