Will a Hiring Slowdown Push the Fed to Cut Rates Soon?

The Labor Department on Tuesday reported that a seasonally adjusted 1.62 million workers were laid off in December, compared with 1.53 million in November. This left layoff levels at 1% of U.S. employment. In the 20 years of available data preceding the pandemic, the layoff rate was never so low.

The layoff figure is consistent with the very low levels of initial claims for unemployment benefits the Labor Department has been releasing each week and suggests that the job market remains healthy, with employment continuing to grow.

This is part of why Federal Reserve policymakers might not signal much urgency to start cutting rates at the conclusion of their meeting on Wednesday. But internally, low levels of hiring might be giving them some sense of urgency nonetheless.

Tuesday’s report showed that employers hired a seasonally adjusted 5.62 million people in December, up from November’s 5.55 million. That is consistent with employment growth because there were more hires than workers leaving their jobs for any reason. But it was below the 2019 monthly average of 5.84 million and much less than 2022’s 6.43 million. In the prepandemic period, the last time the hire rate—hires as a share of employment—was as low as December’s 3.6% was in April 2017.

There are plenty of reasons employers might be holding off on hiring even as they aren’t laying off many workers. And in a job market as large as America’s, all of them are happening to some extent at once.

A lot of employers are simply comfortable with their current number of employees and, unless a worker quits or retires, have no need to hire. Others would like to expand their workforces, but are struggling to find anybody qualified for what they are willing to pay. Or maybe they would like to expand, but are still concerned enough about the outlook that they are dragging their feet on bringing people on board—in which case, fading recession fears could translate into increased hiring.

But another category of employer encompasses those that have been engaging in labor hoarding: They might like to trim their workforces but, scarred by the hiring problems they experienced earlier in the pandemic, they worry that if they do, they will struggle to find suitable workers when they are ready to start staffing back up. Evidence exists that this has been happening. Economists at the San Francisco Fed, for example, find evidence that employers might be adjusting hours in lieu of layoffs. Some employment categories have exhibited less seasonality than before the pandemic, which is also suggestive of labor hoarding.

Part of what makes the low level of hiring troublesome is that it creates a situation in which layoffs wouldn’t have to pick up all that much for the labor market to stop gaining jobs. And if that happened, Fed policymakers would quickly find themselves in a situation that made them shift from thinking they could maybe, possibly cut rates soon by a bit, to cutting rates deeply in a hurry.

Not wanting to find themselves in that situation could be a reason for the Fed to trim rates sooner rather than later.

Write to Justin Lahart at Justin.Lahart@wsj.com