The labor market is deteriorating, growth is slowing, and the Fed’s passive stance may be a costly mistake.
KEY TAKEAWAYS
The February jobs report was far weaker than expected, with nonfarm payrolls falling by 92,000 and unemployment rising to 4.4%. Revisions made the picture even worse, reinforcing the idea that the labor market has effectively stalled over the last six months.
Growth is slowing meaningfully. The second estimate of Q4 2025 GDP was cut from 1.4% to 0.7%, showing the economy was already losing momentum before 2026 fully got underway.
The Fed is confronting two problems at once, but only one of them fits its toolkit. Interest rates can cool demand, but they cannot fix oil supply disruptions or reverse a geopolitical energy shock.
Inflation risk is being driven in part by higher oil prices following the US and Israeli strikes on Iran. That means restrictive policy could worsen growth and employment without solving the actual source of rising prices.
AI is becoming a major labor market transition story, not just a productivity story. In the long run it may create more jobs than it destroys, but in the near term it is adding real friction and displacement that policymakers should take more seriously.
MY HOT TAKES
The Fed is being too passive in the face of visible labor market deterioration. Hiding behind “data dependence” is not neutrality when the data is already flashing yellow.
The central bank is using a demand-management framework to respond to a supply-side problem. That mismatch raises the risk of recession without delivering much relief on inflation.
AI is a long-term economic win, but the transition period is going to be painful and disorderly for many workers. Policymakers should stop talking only about productivity gains and start talking more honestly about labor dislocation.
Forward guidance matters more here than false bravado. Even without an immediate cut, the Fed could do real good by signaling that it takes the employment side of its mandate seriously.
This is a classic case of policy confusion created by overlapping shocks. Oil, geopolitics, labor weakness, and AI disruption are all hitting at once, and that demands sharper thinking than a one-size-fits-all rate posture.
You can quote me: “What the Fed Funds Rate cannot do, no matter where it is set, is produce a barrel of oil.”
Right tool for the right job. I am a handy guy. Growing up with a scientist as a father, I spent much of my younger days–at least as far as I can remember–sitting on the floor next to my father waiting to pass him a tool as he tinkered with this or that. I dreamt of the day where it would be me to take up the tool and apply to the challenge.
Turn the clock forward–A LOT–to just a few short months ago. I went to visit my daughter in Washington DC. There was some fixing that needed to get done in her apartment. Eager to demonstrate my continued usefulness, I was ready to take up the challenge. The day came and the car was packed. Details were attended to–even our dog Eloise has her own bag packed with exactly the right amount of treats. My only job was to remember to bring the right tools. Tools: ✅. We were off. Three state lines,one rest stop, and several hours later, we arrived.
Not too long after we got settled, I grabbed my tool bag and applied myself to the fixing. The whole affair didn’t last more than thirty seconds, as I quickly realized that I didn’t have the right tool. 🫤
That story keeps coming back to me as I watch the Federal Reserve prepare to meet today. Because what's unfolding in the American economy right now is a right-tool-for-the-right-job problem of the highest order, and I'm not sure enough people are saying so clearly enough.
Let’s start with what we actually know. The February jobs report was, in the words of one economist… er, overwhelmingly disappointing. Nonfarm payrolls fell by -92,000, against a consensus expectation of a gain somewhere between 50,000 and 60,000. That is a miss of roughly 150,000 jobs in a single month! The unemployment rate moved higher to 4.4%. Labor force participation fell to 62%, the lowest level since December 2021 outside the pandemic. And then the revisions came, which is where it gets really uncomfortable. December 2025, which we thought was a weak but positive month at plus 48,000 jobs, was revised to a loss of -17,000. That is a -65,000-job swing in a single revision, for a month that already felt soft. This, my friends should be getting more airtime–the labor market has averaged essentially zero net job creation over the past six months. When an economy stops creating jobs, history tells us it usually isn't long before it starts losing them.
Meanwhile, the GDP picture isn't helping anyone sleep easier. The Bureau of Economic Analysis released its second estimate for Q4 2025 last Friday, cutting the growth rate nearly in half, from 1.4% annualized all the way down to 0.7%. Remember, one quarter earlier, the economy had been running at 4.4%. A federal government shutdown that ran through October and November subtracted roughly a full percentage point from that number, which provides important context, but even adjusting for that, the underlying private economy was running meaningfully below trend heading into 2026. Core PCE inflation, the Fed's preferred gauge, is sitting around 2.7% to 2.8%--and here is the critical part–that data doesn't yet fully reflect the energy shock that followed the US and Israeli strikes on Iran in late February. Brent crude has been above $100 a barrel since then. I have done the math for you in some of my recent notes: every ten dollar increase in oil adds roughly 0.2 percentage points to consumer prices. Work through that arithmetic in a sustained triple-digit oil environment and you can see where this is headed. 😨
So, the Fed sits today at the intersection of a weakening labor market and an oil-driven inflation pulse–and I have been writing about this and doing lots of videos on this “Fed is stuck” narrative. Pay close attention to the wording on this now: the interest rate is simply the wrong tool for the energy side of this problem. Monetary policy is a demand management instrument. When consumers and businesses are spending too much and pushing prices up, the Fed raises rates to cool that demand. When demand collapses, it cuts rates to stimulate it back. What the Fed Funds Rate cannot do, no matter where it is set, is produce a barrel of oil. I have been quoted broadly in the press on this: it cannot reopen the Strait of Hormuz. It cannot undo a geopolitical supply shock. Raising rates or keeping them restrictive into an energy-driven inflation surge is not a solution–it is how you get a recession without fixing the underlying price problem. The tools are mismatched with half of what the Fed is being asked to solve.
But the labor market side of the equation is a different story, and this is where I believe the Fed is being too passive and too quiet. The weakening we are seeing in employment is not just a cyclical softness. We are in the early innings of one of the most significant labor force transitions in American history, driven by artificial intelligence. The information sector shed another 11,000 jobs in February alone and has been bleeding an average of 5,000 positions a month for the better part of a year. The federal government workforce has contracted by 330,000 jobs–11% of the entire federal workforce–since its October 2024 peak. And overlaid on all of that is the larger AI story: Goldman Sachs estimates that AI adoption could ultimately displace 6% to 7% of the US workforce, with the transition period creating genuine frictional unemployment as workers move between roles. AI, despite all of its clear positives, is slamming the labor market like a high voltage shock and most countries and most businesses are simply not prepared. That is not a death sentence for the American worker. Far from it! We know that the AI transition ultimately creates more jobs than it destroys. According to some estimates, 170 million new roles will emerge against 92 million displaced, a net positive. But the operative word is transition. Getting from here to there is the hard part, and transitions require support.
That is precisely where I want the Fed to be more aggressive–not necessarily with an immediate cut today, though I would not argue against it 😉–but at minimum with a more evident, dovish-forward guidance that signals clearly to businesses, workers, and markets that the central bank is watching the labor side of its dual mandate with real urgency. The Fed has a congressional mandate that runs in two directions: stable prices and maximum employment. It’s pretty basic–only two responsibilities! Right now, with energy driving the bulk of the inflation problem and the labor market deteriorating through a combination of policy-driven job eliminations and AI-driven structural change, simply sitting on your hands and citing data dependence is not a neutral act. It is a choice. And I think it is the wrong one. The inflation data from before the Iran shock was already moderating on the core side. The labor market was already flashing warning signs before February's ugly number. Stronger guidance now, clearly committed to protecting employment through this AI transition, would cost nothing in terms of actual rate moves while giving the real economy something it badly needs–a signal that the cavalry is on its feet.
Alas, there is a version of this story that ends well. The AI transition, properly navigated, is genuinely positive for long-run productivity and living standards. Workers who adapt will find themselves in an economy that produces more with less, and the benefits of that productivity, over time, get distributed. New industries emerge. New skills command new premiums. That is how it has worked through every major technological inflection in American history, from the industrial revolution through the invention of the internet. Trust me, I was there, watching it from ground zero–this is a win for productivity. I believe this one will be no different. But none of that happens cleanly or automatically. It requires time, support, and yes, monetary policy that keeps its foot off the brake while the transition plays out.
Back to my daughter's apartment. I stood there for a moment, tool bag open, staring at what I couldn't fix. There's a particular kind of humility in that–the gap between confidence and capability, between showing up ready and actually being equipped. My father would have recognized it immediately. The right move isn't to force it with the wrong tool (a message he drove home with me over and over). The right move is to be honest about what you have and what you don't.
The Fed would do well to remember that today. You can show up with all the conviction in the world. But if the tool doesn't match the problem, the job doesn't get done. Acknowledge what monetary policy can fix, and then actually fix it. The labor market, and the workers navigating one of the most wrenching economic transitions of our lifetimes, are waiting. Get to work Fed–we’re counting on you.
YESTERDAY’S MARKETS
Stocks notched a modest third straight day of gains yesterday, with the S&P 500 closing up about a quarter of a percent as Wall Street continued its cautious bounce off four-month lows. Bonds were quiet ahead of today's Fed decision, with Treasury yields little changed as markets held their breath. Oil was the real story–AGAIN–as Brent crude climbed back above $100 a barrel, rising roughly 3% on continued Strait of Hormuz disruption fears. Gold held steady near $5,000, doing what gold does when nobody knows what comes next.
NEXT UP
Producer Price Index / PPI (February) is expected to have inched up to 3.0% from 2.9%.
Factory Orders (January) probably increased by +0.1% after sliding by -0.7% in the prior month.
At 2:00 PM Wall Street Time, the FOMC will release its rate decision which is largely expected to remain unchanged. The big news will be the FOMC SEP (statement of economic projections) release, which includes the infamous Dot Plot. Will the Fed revise its rate projections for the year? Those projections will certainly project the markets, depending on which way FOMC members go with it. Hopefully FOMC members read my note 🙃 before voting. 😉🤣
Important earnings today: Hertz Global, Williams-Sonoma, Macy’s, SailPoints, General Mills, Jabil, Micron, and Five Below.