Everyday Economics: Cooling jobs, a cautious Fed, and a housing recovery that needs confidence

By Orphe Divounguy
The Center Square

The week ahead is framed by three macro threads that are increasingly pulling against each other: a Federal Reserve that is debating how restrictive policy still is, a labor market that continues to cool beneath the surface, and a housing market that’s showing pockets of improved affordability – but transaction volume that remains weak against a fragile confidence backdrop.

We’ll start with a heavy lineup of Fed officials on the speaking circuit. But the bigger signal will come from a delayed jobs report, January existing home sales, and the CPI report.

The labor market is cooling — and the openings vs. job seekers picture has flipped

A useful way to summarize the shift is to compare the balance of job openings and job seekers at the peak of the boom versus now.

In late 2025, there were more job seekers than job openings. In fact, by December there were about 16% more unemployed workers than available openings – a meaningful change from the post-pandemic peak. In April 2022, by contrast, there were roughly 2.3 job openings for every unemployed worker, a labor market tight enough to give workers exceptional bargaining power.

That’s not a small rotation – it’s the difference between a job market where workers can move easily and one where mobility is more constrained, and hiring becomes harder to secure.

This is the “low-hire, low-fire” labor market. Employers are reluctant to cut staff aggressively, but they’re also reluctant to expand payrolls. The result is a labor market that looks stable in the headline unemployment rate – until it isn’t. If the number of job openings continues to decline or layoffs rise even modestly, unemployment could move higher fairly quickly.

Waller’s message: policy is still restrictive, labor is the risk.

Fed Governor Chris Waller just delivered one of the clearest “cut sooner” arguments you’ll hear from a top policymaker. He said he dissented at the most recent meeting because he concluded that a 25bp cut was appropriate. In his view, last year’s cuts moved policy closer to neutral, but monetary policy is still restricting activity – and the data make it clear that additional easing is needed.

His case rests on two points.

First, he argues the labor market is weak despite solid economic growth. The unemployment rate has risen over the past year even if it ticked down recently. More importantly, payroll growth in 2025 was very low compared with the prior decade. Waller goes further: he expects upcoming revisions to show payroll employment growth was essentially flat – “zero, zip, nada.” His point isn’t rhetorical flair; it’s a warning that labor demand has cooled materially and that the labor market can deteriorate faster once it begins.

He also notes something that resonates with business leaders: layoffs may be planned for 2026, based on what he has heard in outreach meetings. That doesn’t mean a wave of job cuts is inevitable, but it does mean uncertainty is rising, and that uncertainty itself can suppress hiring, capital spending, and big-ticket consumer purchases.

Second, Waller argues the inflation story is being distorted by tariffs. Even if tariff effects keep inflation elevated in the near term, he believes appropriate monetary policy is to “look through” those effects as long as inflation expectations remain anchored. In his framing, underlying inflation looks closer to the Fed’s goal and on a path consistent with sustainable disinflation. With that backdrop and a weak labor market, he thinks policy should be closer to neutral – around the median longer-run estimate – rather than staying meaningfully above it.

For markets, Waller’s remarks put a marker down: if the upcoming data confirm labor softness and inflation continues to cooperate, the center of gravity at the Fed could shift toward easing sooner, not later.

Existing home sales: improving affordability meets labor market uncertainty

January existing home sales will mostly reflect homes that went pending in late November and December. Existing home sales “bounced along the bottom” throughout 2025.

Seasonality mattered in December. Activity typically softens around the holidays, which can dampen contract signings even when underlying demand is improving. But there’s also a more constructive trend in parts of the market: affordability has improved, especially in many Sun Belt metros where prices and rents have eased and inventory has risen. Those markets have offered buyers more breathing room than they’ve had in years.

Looking ahead, though, the risk mix is changing. Mortgage rates still matter, but two other factors are becoming increasingly central to the 2026 outlook for housing transactions: slowing population growth and a weaker labor market. Transactions are ultimately a confidence product. Even when affordability improves, buyers and sellers hesitate if job security feels less certain.

CPI: shelter should keep providing downward pressure

On inflation, the key tailwind remains shelter. Rental vacancy rates remain elevated – 7.2% in Q4 – and market rent growth continues to moderate. With official shelter inflation measures tending to lag asking rents—adjusting only as renters move and leases renew—that pipeline suggests continued downward pressure ahead, an important offset if tariff-related effects show up in the near-term data.

The takeaway: the labor market cooling is becoming the dominant macro story. If jobs soften further while CPI continues to ease, the policy debate shifts quickly from “how long to hold” to “how soon to cut,” and housing’s tentative recovery becomes more dependent on worker confidence than on rates alone.