And this is a nightmare for the Fed.
Today, the unemployment rate has reached 4.6% compared to the expected 4.5%, and this is the highest reading since September 2021.
And this indicates a serious danger.
This shows that the US labor market is currently weaker than at any time in the past four years.
Growth is losing momentum.
At the same time, inflation remains around 3%, much higher than the Fed's target of 2%.
This is the Fed's worst setup.
Growth is slowing, but inflation remains high. That's the definition of stagflation.
And stagflation leaves the Fed with no good options.
If the Fed does not cut interest rates, the risk of recession will rise rapidly.
A weak labor market combined with high interest rates often leads to increased job losses.
But if the Fed cuts interest rates, inflation could accelerate again.
We've seen this before.
In 2020, the Fed cut too aggressively, and inflation skyrocketed in 2021.
In 2022, the Fed was forced to begin QT and aggressively raise interest rates.
Now the Fed is stuck between those two mistakes.
That's why unemployment data is so important.
The Fed has broadly planned not to cut interest rates in January.
This rise in unemployment puts pressure on that plan.
Ignoring the data, and risking a recession.
Reacting too quickly, and risking another wave of inflation.
There is also a larger historical warning here.
In the 1970s, the US economy faced something similar.
Inflation is rising, unemployment is increasing while economic growth is stagnating.
At that time, the Fed raised interest rates to nearly 20% and crushed inflation.
But this has led to a decade of loss, with the S&P 500 having a 0% return from 1970-1980.
The risk today is similar but not at that level.
However, the Fed needs to fight this.
If the Fed focuses on reducing inflation, there will be a major collapse followed by a significant recovery.
I do not think the Fed will do what they did in the 1970s, so more easing is expected in 2026.
But what happens next will be very clear.
