White House Economists Believes Fed Rate Hikes May Be Over for 2026, Points to Weak September Jobs Report

White House Council of Economic Advisers Chair Chris Phelan said he does not expect the Federal Reserve to raise interest rates again this year after a weaker-than-expected September jobs report added to evidence that inflation and the labor market are cooling.

Phelan pointed to Friday's employment data and recent comments from senior Fed officials as reasons the central bank could remain on hold after raising rates in September. "I think with today's job market data, and a speech by the [Fed] vice chairman, I think the market is now no longer expecting another rate hike," Phelan told Yahoo Finance on Friday.

The U.S. economy added just 29,000 jobs in September, significantly below economists' expectations and down sharply from a revised gain of 133,000 in August. The unemployment rate edged up to 4.2% from 4.1%, according to the Bureau of Labor Statistics.

The latest report also included weaker revisions for previous months. July payrolls were revised down by 31,000, turning an initially reported gain of 21,000 into a loss of 10,000 jobs, while August was revised down by 29,000. Combined, employment gains for July and August were 60,000 lower than previously reported.

Phelan, however, argued that the slower pace of hiring does not necessarily indicate a weak labor market. He estimated that the economy needs to add only around 40,000 jobs a month to keep the unemployment rate roughly stable and said an unemployment rate around its current level represents a healthy labor market.

"I think the job market's going well," Phelan said. The White House economist also renewed his criticism of the Fed's decision to raise interest rates by a quarter percentage point in September, calling the move a "mistake" because inflation had already begun to moderate.

"I said right before they raised rates that it would be a mistake to raise rates. I said right after they raised rates that it was a mistake to raise rates," Phelan told Yahoo Finance. "My view was simply keep your eye on the ball."

Phelan pointed specifically to the Personal Consumption Expenditures price index, the Fed's preferred inflation gauge. Headline PCE inflation eased to 3.4% in August from 3.7% in each of the previous two months, while core PCE, which excludes volatile food and energy prices, slowed to 3% from 3.3% in July.

Phelan said the three-month annualized rate of core PCE is running at about 2%, arguing that inflation was already moving in the right direction before the Fed's September increase. "So we are already making progress on inflation," he said. "It's coming down before they took any action."

Fed policymakers, however, have not declared victory over inflation. Vice Chair Philip Jefferson and New York Fed President John Williams have both acknowledged that inflation remains too high while signaling that policymakers can afford to wait for more data before deciding whether additional tightening is necessary.

Williams said there was "no need for urgency" following September's rate increase and that policymakers have time to gather more information. Financial markets also shifted sharply toward expectations of a pause after Friday's employment report. Reuters reported that policymakers are increasingly expected to leave rates unchanged at the Fed's October 27-28 meeting, although another increase later in the year remains possible.