[Fed Watch] U.S. Labor Market Freezes as AI Advances, Bolstering Odds of a December Rate Cut

U.S. Weekly Job Losses Averaged 13,500 Over the Past Four Weeks
“Employment Is a Bigger Concern Than Inflation” — Fed Officials Call for Rate Cuts
Can the AI-Driven Employment Shock Be Fixed Through Monetary Policy Alone?

Job losses in the U.S. private sector have accelerated noticeably over the past four weeks. As AI-driven reductions in labor demand—especially in the tech industry—begin to take hold, the broader job market is freezing up. This has prompted growing calls for rate cuts not only from the market but also within the Federal Reserve, as more officials argue that preventing a labor-market downturn is now a more urgent priority than restraining inflation.

Private-Sector Hiring Data Continues to Worsen

On the 25th, ADP—a private employment data provider—reported in its weekly update that U.S. companies cut an average of 13,500 jobs per week over the past four weeks. This marks a sharp deterioration from the previous week’s pace of 2,500 weekly losses. ADP said holiday-season spending has been weaker than expected, which could delay or restrict hiring, adding that soft consumption may further weigh on the labor market.

Because the October 1–12 federal government shutdown disrupted the release of figures from agencies such as the Bureau of Labor Statistics (BLS), Wall Street is watching private-sector indicators like ADP’s much more closely. Although revised publication schedules have been issued, key data—such as the monthly nonfarm payrolls (NFP) report—will not be released until December. For now, ADP’s data is exerting an unusually large influence on market expectations.

According to CME FedWatch, the probability of a 0.25 percentage-point rate cut at the December FOMC meeting jumped to 84.9% after ADP’s release—up from 50.1% a week earlier. FedWatch tracks federal funds futures to assess how markets expect U.S. monetary policy to evolve.

Rate-Cut Sentiment Gains Ground Inside the Fed

Support for rate cuts is growing within the Federal Reserve. Mary Daly, President of the San Francisco Fed, told The Wall Street Journal on the 24th that the “rapid deterioration in the labor market will be harder to manage than inflation,” expressing clear support for lowering rates. The WSJ noted that although Daly does not vote at this year’s FOMC meetings, her policy stance is closely aligned with that of Chair Jerome Powell, making her remarks significant.

Christopher Waller—widely viewed as a leading candidate for the next Fed chair—echoed the sentiment in an interview with Fox Business the same day. He said he does not expect the labor market to rebound “within the next few weeks” and sees “no empirical evidence” that firms will resume large-scale hiring. While acknowledging a slight uptick in inflation, he said it is likely to fall again, estimating underlying inflation (excluding tariff effects) at roughly 2.4–2.5%. His comments underscored that weakening labor conditions should take priority over concerns about a temporary inflation rise.

John Williams, the influential President of the New York Fed, also said on the 21st that there is room for “additional rate cuts in the near term,” arguing that avoiding unnecessary risks amid labor-market fragility is as important as meeting the inflation target. Fed Governor Stephen Miran went even further, calling recently for more aggressive easing and arguing that the Fed should deliver a 0.5-percentage-point cut at next month’s meeting given rising concerns over labor-market weakness and slowing growth.

Technological Change Is Fueling a New Employment Shock

Some analysts warn that cutting interest rates alone will not fully offset the strain on the labor market. Much of the recent deterioration is tied to advances in artificial intelligence. A survey by the New York Fed in August found that 12% of service-sector firms using AI had reduced hiring over the past six months because of the technology. A Dallas Fed survey likewise showed that 10% of companies saw lower labor demand after adopting AI. In effect, AI is reducing firms’ need to expand headcount and is acting as a drag on employment.

The trend is clear in the data. According to a recent report from Challenger, Gray & Christmas (CG&C), U.S. companies announced 153,074 layoffs last month—up 183% from September’s 54,064 cuts and 175% from a year earlier. It is the highest October total since 2003, when mass layoffs followed the collapse of the dot-com bubble.

Tech was the epicenter of the losses. The sector announced 33,281 layoffs last month—an almost 490% jump from September’s 5,638—as major firms accelerated AI investments and cut roles that could be replaced by automated systems. Amazon announced 14,000 layoffs at the end of last month, and Microsoft revealed plans in July to cut 9,000 positions. CG&C wrote that “disruptive technologies are reshaping industries much as they did in 2003,” adding that it was striking to see so many layoffs in October, a period when companies typically avoid cuts ahead of the holiday season.