On the other hand | No AI jobs apocalypse, but Fed rate cuts not dead yet

Last night’s January jobs report appears, on the surface, to put further Fed policy rate reductions in indefinite abeyance.

In the wake of President Trump’s “Liberation Day” announcement back in April 2025, there were a plethora of dire prognostications issued over the likely course of the US and global economy.

In essence, the received wisdom was that the tariff announcements would, at least in the short-term, make inflation “stickier” and that, further, in order to quarantine that price impact from becoming embedded in inflation expectations, and thereby become self-fulfilling, the Fed would need to adopt a conservative approach to reductions in the policy rate.

Additionally, a lax approach to the budget deficit that was already around 6 1/2 per cent of GDP would compound an already challenging bond issuance picture that would see bouts of market indigestion that would at the very least prevent bond yields from falling and perhaps send them higher.

An environment of relative monetary tightness, combined with some activity diminishing impact from tariffs and higher bond yields were thought to presage a “stagflation-lite” type scenario with inflation stuck at 3 per cent or more and activity growth flirting with a recessionary environment. That was thought to be a particularly challenging environment for risk markets.

Certainly, elements of that macroeconomic scenario did eventuate: inflation was “sticky” (but maybe not as “sticky” as feared); the Fed erred on the conservative side when it came to rate cuts; and US 10-year bond yields spent most of the time since “Liberation Day” comfortably north of 4 per cent.

Economic growth, however, barely missed a beat even if labour markets did show some signs of cooling (albeit remaining some way from a feared cratering).

Using the current Atlanta Fed GDPNow December quarter number of 3.7 per cent as a proxy for that quarter (which includes the softer-than-expected December retail sales data released on Tuesday), US GDP growth averaged around 2.8 per cent in 2025. That is a healthy clip and way above what was thought likely back in April.

This week’s payrolls data seemed to indicate that the labour market remains in a satisfactory position. Employment grew 130k, led by a 172k advance in private employment, and the unemployment rate unexpectedly fell to 4.3 per cent. No real signs there of an AI-led jobs apocalypse.

Despite being some way from an apocalypse, it is still probably the case that, in aggregate, jobs growth might have expected to have been a little greater over the last year or so, given what we know about activity growth.

The missing link is productivity and what it might imply for the US economy’s speed limit and inflation.

Since the end of 2022, US productivity growth has averaged around 2.5 per cent per annum. (By contrast, Australia’s productivity growth has been around -0.5 per cent over the same period.)

Currently, consensus forecasts for January core inflation suggest an outcome of around 2.5 per cent when that report is released tomorrow. That would be the lowest since the depths of COVID back in March 2021 and comes despite the inflationary effects of tariffs. US trimmed-mean measures are thought to come in around 2.8 per cent, the lowest since May 2021. Again, by contrast, Australia’s trimmed-mean inflation rate is higher than a year ago at 3.3 per cent (12 months to December).

As Federal Reserve Chair designate, Kevin Warsh, points out, tremendous (largely AI-motivated) investment has wrought a productivity dividend that has raised the economy’s “speed limit”, allowing the economy to grow faster before igniting inflationary pressures, thereby opening up the prospect of policy interest rate reductions in the US. This is a credible, if debatable, position.

The emergent disinflation picture suggests that a cut in the policy rate is still a possibility under Chair Powell, even with a better-performing labour market in January. That might be less likely with ongoing resilience in the labour market, but not impossible should ongoing falls in inflation occur.

And a changing of the guard at the top of the Fed could well see the policy rate lowered multiple times this year, especially if the incoming Chair’s thesis is accurate.

Quick update on the RBA: further policy rate increases far from a done deal

In contrast to the US, the inflation picture in Australia seemed to deteriorate reasonably rapidly over the latter part of 2025.

The causes have been long discussed and are reasonably well known (too much monetary easing, lack of fiscal and structural/regulatory support for anti-inflation policies, deteriorating productivity/high unit labour costs) – I don’t intend to traverse them again.

However, there is somewhat of a glimmer of hope on the inflation front, even if there is a sting in the tail when it comes to profit margins.

The latest NAB Monthly Business Survey for January, released earlier in the week, revealed that product price growth and retail price growth fell to 0.5% and 0.3% respectively (January per cent change at a quarterly rate). Those price growth measures sit at their lowest levels since 2021. Significantly, both purchase and labour cost measures are also at their lowest since 2021 but are running higher than product and retail price growth (and have been for some time), implying potentially significant pressure on profit margins.

That glimmer of a more positive inflation picture at the margin suggests that further policy rate increases from the RBA are far from a done deal.

Stephen Miller is an Investment Strategist with GSFM. The views expressed are his own and do not consider the circumstances of any investor.