In a new analysis shared with Fortune, Swonk argues that Powell is treating the slowdown in hiring as a sign of weakening demand that must be offset with lower interest rates. But if that weakness is being driven instead by structural forces—specifically, AI adoption and sharp declines in immigration—then cutting rates won’t fix the underlying problem and could worsen inflation.

“Powell risks the Fed’s inflation-fighting credibility if the weakness in employment is due more to AI and curbs in immigration than weak demand,” Swonk wrote.

That warning comes after one of the most contentious Federal Open Market Committee meetings in years. The Fed cut rates by a quarter point for the third meeting in a row, taking the federal funds rate down to 3.5%–3.75%, but the vote fractured the committee. Swonk notes it was the first time since 2019 that there were three dissents, and they came “in opposite directions.”

Governor Stephen Miran — currently on leave from the White House Council of Economic Advisers — voted for a half-point cut, while Kansas City Fed President Jeff Schmid and Chicago Fed President Austan Goolsbee voted to hold rates steady.

Swonk highlights that the Fed’s statement resurrected language meant to indicate a pause: “In considering the extent and timing of additional adjustments… the Committee will carefully assess incoming data, the evolving outlook and the balance of risks.” Powell reinforced that stance, saying “We are well positioned to see how the economy evolves” and emphasizing that policymakers would need to “be a bit skeptical” of data distorted by the government shutdown.

But the bigger issue, Swonk argues, is that Powell kept pointing to imminent downward revisions to employment, revisions she warns may not mean what the Fed thinks they do.

If job growth is negative because automation is replacing workers or because the labor force is shrinking due to immigration policy, then monetary policy can’t solve the problem. That’s because rate cuts can stimulate demand, but they cannot create workers or reverse automation decisions already made by firms. 

“The challenge is if that weakness is due to AI and curbs on immigration, then rate cuts will not do much to shore up the labor market. More could show up in inflation,” she wrote.

Powell, during the conference, acknowledged that AI may be “part of the story” behind the cooling labor market, citing major employers like Amazon that have linked hiring freezes and job cuts to automation. But he stressed that it’s “not a big part of the story yet,” and said it’s too early to know whether this wave of technological change will ultimately destroy more jobs than it creates.

He also noted that labor supply has “come down quite sharply” due to a drop in immigration and participation.

A misread could become especially dangerous given the fiscal backdrop. Swonk notes that “expansions to tax cuts last year will show up as a record high tax refunds in early 2026,” warning that the windfall could “further entrench inflation much like we saw in the wake of the pandemic.” 

At the same time, federal debt is projected to surpass GDP for the first time since World War II, marking a level of issuance that is “a lot of debt for bond markets to absorb.”

Swonk also flags mounting risks to credibility inside the Fed itself.

Six participants wanted to hold rates steady, and the market openly dismissed Powell’s attempt at a hawkish spin: investors “priced in more cuts after the meeting,” she notes. Powell now appears to be one of the more dovish voices on the committee, raising questions about the direction of policy if the administration installs a new chair aligned with Miran’s more aggressive easing stance.

Swonk expects the Fed to pause early next year, but warns that if inflation fails to cool as expected, “the bond market could grow more skittish about rate cuts.”

The move was widely anticipated, but the tone was not. Officials paired it with with firmer language about the “extent and timing” of additional adjustments, phrasing that, in what economists call Fed-speak, raises the bar for further cuts and underscores the committee’s unease about inflation, which the statement noted has “moved up” and “remains somewhat elevated.”

The decision also exposed the widening fractures inside the central bank toward the end of Chair Jerome Powell’s term. Three officials dissented, but in opposite directions: Stephen Miran pushed for a larger 50-basis-point cut, while Austan Goolsbee and Jeffrey Schmid argued the Fed should hold rates steady. It’s the rare meeting where hawks and doves both object, a scenario analysts had warned was increasingly probable as disagreements sharpened over how quickly the labor market is cooling, and how much restraint inflation still requires.

The December meeting also carries unusual weight because it may be the final one in which Powell still has his authority as Fed chair. His term expires in May, but President Donald Trump has already vowed to announce a successor early in 2026, effectively creating a “shadow chair” before Powell leaves. 

“Feels like in a way the last Powell Fed meeting,” Bloomberg’s Conor Sen wrote on X. Powell is slated to speak at the conference shortly after the announcement. 

Labor market concerns drove the cut

Wednesday’s decision was justified primarily by weakening conditions in the job market. Hiring has slowed markedly since the summer, while unemployment has ticked up and businesses across industries have begun signaling greater caution, even though the layoffs themselves have not yet surged in the official data.

Private-sector signals have flashed more urgency. ADP’s November report showed employers shedding a net 32,000 jobs, the sharpest decline in more than two years. Nearly all of those losses came from small businesses, which cut 120,000 positions, while medium and large firms kept adding workers. Economists view that pattern as a warning sign: small businesses are the most sensitive to rising costs and weakening demand, and they often pivot first when conditions deteriorate. 

The government’s long-delayed JOLTS report, released Tuesday, added another layer. Job openings in October rose modestly, but remained far below last year’s levels; the quit rate fell to 1.8%, the lowest since early 2021; and hiring remained stuck at 3.2%, consistent with what economists and Powell himself have called a “low hire, low fire” labor market. Companies aren’t slashing staff outright—but they aren’t expanding either. That’s enough to worry economists.

“Low hiring on its own is bad news,” top economist and Fed-watcher Claudia Sahm told Fortune. “It puts upward pressure on unemployment, and that’s the dynamic the Fed is trying to get ahead of.”

A deliberately cautious message

The Fed sought to balance labor-market concerns with the political sensitivity of cutting rates while inflation is still elevated.

Fed officials will want more flexibility than signalling the cutting cycle is open-ended. Unemployment remains low by historical standards; consumption has been resilient among high-income households; and financial markets have surged on expectations of easier policy next year. Powell has warned markets over-read his intentions this year.

Still, Powell cannot declare victory or signal a pause with confidence. The November jobs report arrives just days after the meeting, and he will want flexibility in case that comes out worse than expected, so he doesn’t look “flat-footed,” Sahm said. 

The limits of preemption

For the Fed, the goal is to smooth out the cycle—to cut early enough to prevent a deeper downturn without abandoning the fight against inflation, still sticky at 2.8%, higher than the Fed’s preferred rate of 2%. Sahm, who helped design the Fed’s framework for interpreting labor-market inflection points, argues timing is crucial.

“If the Fed waits to cut until they see clear deterioration, they’ve waited too long,” she said. Initial jobless claims remain low, she noted, but they are not predictive. As a lagging indicator, they tend to spike only after a recession has begun.

The central bank’s challenge now is to navigate between those competing risks while markets, the White House, and Congress push for clarity the Fed cannot yet provide.

If the Fed has to continue easing into early 2026, Sahm argues, it will not be a bullish signal.

“If they end up doing a lot more cuts,” she said, “then something has gone wrong.”