Labor Market Crisis Warning: David Rosenberg Analyzes the Necessity of the Federal Reserve's Aggressive Rate Cuts

The US economic outlook is shrouded in uncertainty. Recently, former Merrill senior analyst David Rosenberg issued a warning, believing that the greatest risk to the US economy does not lie elsewhere, but in the widely overlooked vulnerabilities of the labor market. This experienced economic observer pointed out that people are still immersed in the illusion of a “soft landing” in the employment market, unaware that the true situation may be—labor supply is rapidly shrinking.

Unemployment Rate Nearing Breakthrough, Recession Expectations Rising

According to David Rosenberg’s analysis, an increase in the US unemployment rate is highly probable. The analyst predicts that the unemployment rate will soon surpass the 5% threshold, and more challengingly, by the end of the year, this figure could even reach 6%. Such changes in the unemployment rate imply that the employment market is shifting from a mild adjustment to a substantial contraction.

Once the labor market enters a contraction phase, the chain reaction leading to a recession will be triggered. Fewer job opportunities → income decline → weak consumption → slowing economic growth. This causal chain is tightly interconnected and difficult to break. David Rosenberg believes this is the “black swan” that could hit the US economy in 2026.

Federal Reserve Forced to Turn: 125 Basis Point Rate Cut Cycle

Faced with the collapse of the labor market and the resulting economic recession pressure, the Federal Reserve will have no choice. David Rosenberg expects that by the end of 2026, the Fed will have to initiate a significant rate-cutting cycle—totaling a 125 basis point reduction. This means implementing five consecutive 25 basis point cuts over five quarters, ultimately lowering the interest rate to 2.25%.

This policy shift marks a complete change in the cycle. Moving from the previous tightening cycle to a cutting cycle, the Fed’s policy orientation will shift from controlling inflation to stimulating the economy. For the markets, this means a return to loose liquidity, which could support risk assets such as commodities and stocks.