Frozen Labor Market?

Jeffrey Praissman sits down with Michael Normyle, NASDAQ’s economist, to unpack the Fed’s latest message—and why balancing inflation and employment has gotten harder. They discuss AI data-center investment and why it boosts growth more than jobs, how reduced immigration changes the “break-even” pace of hiring, what’s driving today’s uncertainty, and why small businesses feel higher rates more than large caps.

Jeff Praissman  

Hi everyone. This is Jeff Praissman with Interactive Brokers. It’s my pleasure to welcome to Interactive Brokers Podcast Studio NASDAQ’s Economist Michael Normyle. Hey Michael, how are you?

Michael Normyle  

Hi. Doing well, thanks.

Jeff Praissman  

And welcome back to the studio, love having in here for our monthly chats on the economy. And this time we’re gonna cover some of the most recent news, right?

So, Michael January 28th the Fed released their latest FOMC’s statement discussing economic activity, employment outlooks and inflation. But of course, a little bit later we had this jobs report that came out in doubled expectations. So, I want to like start with the basics for our listeners.

The Fed statement emphasized that the committee is, quote unquote, attentive to risks on both sides. If it’s a dual mandate, could you explain what these two mandates are, and you know why balancing them simultaneously is so challenging?

Michael Normyle  

Sure, and I guess it’s worth mentioning at the minutes from that meeting. Are coming out soon, so we’ll get a little bit more detail once we see the minutes. But like you said, the Fed, it has a dual mandate and that’s actually somewhat unusual for central banks. Many have a single mandate often related to inflation.

In the Fed’s case, the dual mandates are price, stability, and full employment. And so, by that they mean they want to keep inflation stable near their 2% target measured by PCE inflation in the long run. By full employment, they want the highest sustainable level of employment that won’t drive up inflation.

So, this is a bit trickier to define since it changes due to business conditions and demographics, regulations and more. The Fed’s long run estimate of the unemployment rate is a good kind of estimate of this number, and the Fed currently puts it at 4.2%. So, it’s important to note that the level of unemployment, that some level of unemployment is actually healthy for the economy as people can look for new jobs that are better suited for them, which helps maximize productivity.

Oftentimes, balancing these two mandates isn’t as challenging since when the economy’s running hot, you’ll see inflation rising, unemployment falling, and that means higher rates are needed to cool the economy. And we saw this during the Fed’s 2022 to 2024. When the economy is slowing or in recession, inflation will fall and unemployment will rise, and that will require lower rates.

These days though, it’s a bit trickier where we have above target inflation plus an unemployment rate that’s just above that long run estimate that the Fed has, but it’s also been rising over the last year. In this scenario, the Fed has to choose which of its mandates to emphasize. In recent months, we’ve seen the Fed cutting rates because they believe the above target inflation is mostly a one-off from tariffs, so they want to cut rates to prevent the unemployment rate rising Too much more from here.

Jeff Praissman  

And there seems to be a contradiction in the Fed’s assessment. They note that, economic activity has been expanding at a solid pace, but they’re also noting that the job gains remain low. So how do they reconcile these, seemingly opposing observations? And what does this tell us about the nature of our current economic growth?

Michael Normyle  

I think it’s really a reflection of two different trends. First on the solid pace of economic expansion, we’ve seen a big boost to economic growth from investment in AI data centers. So, research from Alpine Macro showed that economic growth in 2025 with data through Q3. It was essentially half tech investment, half consumer spending in terms of contribution to total growth.

However, tech investment isn’t going to drive a lot of job gains data centers, they boost construction employment temporarily while they’re built, but they only need a few hundred employees to operate once they’ve opened. Second, with job gains remaining low, that’s a reflection of reduced immigration.

So, research from Brookings suggests that net migration may have actually been slightly negative in 2025. That’d be the first time we’ve seen that in at least half a century. So flat or negative migration naturally reduces the number of jobs added in the economy because immigrants are both a source of labor supply and labor demand because they’re also consumers.

So that means that the trend rate of job growth will depend largely on domestic population growth. And from 2019 to 2025, US-born labor force growth average just 0.26% per year. So, when you take that all together. It boils down to this concept of the breakeven employment level. That’s the number of jobs that the economy needs to add each month to keep the unemployment rate the same.

Brookings estimates that the breakeven level is around 15,000 jobs per month. Since with lower immigration, it’s mostly reliant on that US-born labor force growth, which is pretty slow. Just a couple years ago that breakeven level was 140,000, so nearly 10 times higher. So monthly job getting job numbers need to be considered in this context.

What qualifies as a good jobs report now is different from a couple years ago. So the Fed’s assessment that job gains have remained low, isn’t necessarily indicative of a weak economy, but it is clear that the labor market isn’t especially strong at the moment.

Jeff Praissman  

Yeah, and the Fed’s describing inflation as somewhat elevated while maintaining their 2% target. What tools does the Federal Reserve have at his disposal to bring inflation down to that goal while, also supporting maximum employment?

Michael Normyle  

The main tool that the Fed has, of course, is its policy rate, which is often called, actually a blunt tool. Since its effects are pretty broad, there’s no really targeted option. So, when inflation is above target and the Fed wants to get it lower, it’ll hike the Fed’s fund rate fed funds rate to cool off demand.

That’s because the Fed funds rate, it feeds through into short term rates in the economy that makes it costlier to borrow which dampens demand, and that should result in slower inflation. But of course, this takes time. In the last cycle, the Fed started hiking rates in March of 2022 and they were pretty aggressive doing it, but inflation didn’t peak until June 2022, and it still hasn’t gotten back to 2% over this nearly four-year period.

Essentially, to a much lesser extent, the Fed can also exert some influence over rates just by providing forward guidance, meaning talking about what they plan to do and by adjusting their balance sheet, if the Fed lets its holdings of bonds and other assets mature without replacing them that way, they’re pulling money out of the economy, which can also help cool inflation at the margin but both of these are much less influential than the policy rate.

Jeff Praissman  

And there’s a lot of uncertainty out there, and the committee actually states and I quote, “uncertainty about the economic outlook remains elevated”. What specific factors do you think are contributing to this heightened uncertainty? How does this impact the Fed’s decision-making process going forward?

Michael Normyle  

There are a number of contributors to uncertainty right now. Of course, there’s trade policy. We have the Supreme Court set to determine the legality of the IEA tariffs any day now, which could impact inflation, demand government revenues at least temporarily until replacement tariffs are put in using other measures.

There’s geopolitical uncertainty. That often impacts inflation and demand through commodity prices. Plus, there’s this prevailing uncertainty about AI and how it’s going to impact the labor market. And that’s just to name a few. So, in this uncertain environment, the Fed, they tend to move slowly.

At least that’s how they’ve been behaving in recent years. Right now, markets are looking for about two rate cuts this year. So that implies that they’re going to pause between cuts, that gives them time to see incoming data, determine what the next move is. And this is unlike the end of last year where we saw three straight meetings of cuts.

So, with that uncertainty they can take their time to decide when to cut and to wait for an extra month or two of data. They have that luxury a little bit now.

Jeff Praissman  

And I want to go back to where we started with the jobs report. So, we saw 130,000 jobs added in January, which was double the expectations, however, like even just going back to 2025 the entire year, after revisions only I think 181,000 jobs were added. Could you start, where you mentioned 15,000 jobs for break-even compared to, I think it was the number you gave was 150,000 or, 10 times as much.

But could you put these numbers for our listeners in historical context and explain this this contrast that we’re seeing?

Michael Normyle  

Yeah, and I think that January figure, that headline number, it’s a little bit misleading, but that’s also, it’s a microcosm of what we saw in 2025. So, it works as a good sort of example of what we saw. So, of that 130,000 jobs, 137,000 came from education and healthcare alone. On the other hand, it was depressed by a drop of 42,000 jobs in the federal government in 2025.

Like you said, 181,000 jobs were gained, 697,000 came from education and healthcare. Again, on the other hand, it was depressed by a drop of 289,000 jobs in the federal government, but that was on purpose, right? Because of the DOGE efforts to shrink the size of the federal workforce. So, gains, they’ve been pretty narrowly driven in the last year, plus January, and the headline numbers at the same time, they’ve been depressed by that effort to reduce the federal workforce. From a historical perspective, this is a pretty weak number for a period where the economy is an expansion.

The last time we saw a similar performance in a year of economic expansion was 2003 when the economy added 124,000 jobs, and that was part of what was called the jobless expansion that followed the 2001 recession. Prior to 2025 we hadn’t seen fewer than a million jobs added in a year. Excluding recessions since 2003. So, while many people want to attribute this slow hiring to AI, there are a number of factors at work here. One is broader economic uncertainty, like we talked about, which has made companies hesitant to commit to hiring new workers.

There are also relatively high borrowing costs compared to where things were. A few early, a few years earlier, which has pinched margins at smaller companies, and they’re the biggest employers of workers in the US. And then on a sector specific basis, there was some over hiring from tech companies in the early part of the pandemic.

So, they’ve pulled back on hiring and they’ve even shed some jobs. And then with this perception that the labor market is weak, people have been hesitant to quit jobs, meaning there’s less replacement hiring happening as well.

Jeff Praissman  

And, the unemployment rate, ticked to lower than 4.3%. And given in context of the, the weak overall job creation that you’re, describing, how can the unemployment rate be falling then, what dynamics are can be used to explain this?

Michael Normyle  

Yeah, I think we need to take this with a grain of salt since the unemployment rate is derived from the household survey. That tends to be a bit noisier than the establishment survey, and that’s the survey that gives us that headline jobs number. So, the household survey actually showed the economy adding over 500,000 jobs in January.

So really different from what the establishment survey was showing at 130,000. But that 500,000 plus jobs added, outpaced the number of people joining the labor force and nearly 400,000. So that meant that the number of unemployed people fell and that pushed down the unemployment rate. Still the idea that we can see a low number of jobs added and unemployment rate falling does get back to what I was saying earlier about the break-even jobs number being quite low these days.

Jeff Praissman  

And after the jobs report, Michael, the treasury yields rose and investors paired back there, rate cut bets. Could you walk our listeners through the connection between strong jobs, data and expectations, about the Federal Reserve’s interest rate policy?

Michael Normyle  

Sure. So, I think that’s really a sign that markets think after this pretty solid jobs report, that means that the odds that the Fed needs to cut rates fell slightly after this report. That means the Fed might feel more comfortable at the margin holding off on its next rate adjustment a little bit longer.

Even still, markets are still looking for roughly two cuts this year. It’s a relatively small adjustment where, instead of looking for 55 basis points and cuts, maybe now it’s 50. It’s not like they’re getting rid of a whole rate cut in response to this, but it is moving things at the margin.

Jeff Praissman  

I like to dig deeper into the labor market. And you touched on it earlier with one of your answers as far as the, the deep freeze in hiring and the quitting rate just at 2%, which is well below the 2.3 average from, a few years ago, back in 2019.

Could you explain this, adverse feedback loop where if people aren’t quitting because hiring’s low, but then hiring’s low, partly because people aren’t quitting.

Michael Normyle  

Sure. So, for some background, the quits rate, it’s the share of workers quitting their jobs each month and it peaked back in March of 2022 at 3%. That was really the sort of peak great resignation time where there was all a really strong labor market, and it was also right in line with the start of the fed’s rate hike cycle which was designed to cool off the labor market. Since then, it’s come down to 2% by the summer of 2024, and it’s actually been relatively stable over the last year and a half here. So, over that couple year period where people saw the labor market cooling from 2022 to 2024, that at the margin starts to make people hesitate to quit their job, they see this weakening labor market, and so maybe they think it’s, less and less realistic for them to quit their job.

And that means less hiring is needed because fewer people are quitting, and that sets off that feedback loop that you were talking about. So, we need something to kickstart the labor market into more of a virtuous cycle, but that hasn’t happened yet. Fortunately, we haven’t also seen a major deterioration in the labor market. So, while hiring and quits have been low, layoffs have been low at the same time too.

Jeff Praissman  

And, morale, like consumer confidence data is, really particularly troubling. Actually, only 43% of the people think they could find a new job within three months if they lost their current one, which is the lowest on record. How does this psychological factor of this worker anxiety because this cycle and then, what would it take to break the cycle that we’re talking about?

Michael Normyle  

I think this mainly gets at the reason why the quits rate is so low. People don’t feel confident about finding a new job, so they hold onto the one that they have. Even if that means things like accepting smaller annual wage gains, for example, I think an element also gets back to people need to learn to understand what qualifies as a good jobs number these days. So, if people see the economy added 50,000 jobs in a month, but they remember just a couple years ago was 150, 200,000, that might make them think that the labor market is worse than it is. Not knowing about the context of what this kind of break-even jobs level is at this point. So, part of the way to address this confidence issue is getting a better understanding at a broad level of what that kind of normal jobs number is these days. On top of that, also kick started hiring to get that hiring rate picking up a little bit too. And then I think that might get people feeling a little bit more confident about the labor market.

Jeff Praissman  

And for our last question, I’d like to talk about the uneven impact across businesses. You mentioned it earlier, like small businesses are really vulnerable to, both the tariff costs and the high interest rates. And we talked about it with the hiring, freeze, a lot of these small businesses too are like relying on the credit card borrowing as well as for inputting money. So, what does this tell us about how monetary policy affecting different types of businesses you unequally.

Michael Normyle  

A big factor here, like you said it’s how these companies borrow. If you’re a small company, you’re much more reliant on floating rate debt, and that leaves you highly exposed to the Fed funds rate. And this even includes publicly listed smaller companies, micro-cap, small caps. So, the NFIB, they do a survey of small businesses and that shows that the average short-term loan rate rose from a low of 4.1% during COVID to a high of 10.1% in 2024 around the peak in that fed funds rate. With the Fed cutting rates and over the last year and a half, it’s come down to 9.1% in January. So that’s still much higher to much closer to that cycle high than the cycle low. So lower rates, they’re starting to ease the burden on small companies, but it’s still a lot tougher than a few years ago.

And with public companies, if you look at the interest expenses, a share of earnings for small caps, it’s doubled from 23% to 48% during the fed’s rate hike cycle. It’s since come off modestly to 45% when the Fed’s been pivoting to cutting rates, but if you look at large caps where they have a lot more access to fixed rate debt and they took advantage of low rates during COVID, their interest expense as a share of earnings rose from just 10% to 13% over the same time period.

So, it’s a dramatically different impact, but it’s also, it’s partly exaggerated by the unique experience of seeing ultra-low zero rates during COVID, followed by an aggressive rate hike cycle from the Fed.

Jeff Praissman  

Michael, this has been great as always. For our listeners, to get more from Michael Normyle, you can go to nasdaq.com and click on Insights, or you can go to our website interactivebrokers.com, click on Education, and go to the IBKR Campus for past podcasts and articles and everything else.

And Michael great to have you in here, and we’ll see you next month.

Michael Normyle  

Thanks.