Core Viewpoint - The article discusses the significant divergence between the U.S. economy and employment since the third quarter, with economic recovery contrasting sharply with a rapid cooling in the job market. This situation has prompted the Federal Reserve to restart interest rate cuts, with future rate paths heavily dependent on the evolving relationship between economic performance and employment trends [2][3][4]. Economic Recovery Factors - The economic recovery is attributed to two main factors: the decline of negative narratives surrounding "tight fiscal" policies and "high tariffs," and the positive impact of the AI wave and a bull market in U.S. tech stocks, which have driven capital expenditure expansion in the corporate sector and wealth effects in the household sector [3][9]. - The fiscal expansion is highlighted by the introduction of the "Big and Beautiful Act," which has led to a significant increase in tax cuts, contributing to a rise in the fiscal deficit to $440 billion in the third quarter, a substantial increase from the previous quarter [9][12]. - The high tariffs imposed by the Trump administration have resulted in a notable increase in tariff revenue, estimated at around $30 billion per month, which has helped alleviate fiscal pressure despite its limited impact on inflation [12][19]. Employment Market Dynamics - The cooling of the job market is driven by both demand and supply factors. High interest rates have suppressed traditional industries, while tariffs have impacted corporate profits. Additionally, the AI technology has shown a contractionary effect on employment in the tech sector, leading to a continuous decline in hiring demand [3][29]. - From March to July, approximately 1.4 million immigrant workers exited the labor market, contributing to a simultaneous contraction in both demand and supply, resulting in a significant drop in new job additions while the unemployment rate remained stable [29][30]. - The article notes that the current employment growth is primarily affected by industries sensitive to interest rates, tariffs, and technology, with the tech sector exemplifying a "strong growth, weak employment" scenario [35][38]. Federal Reserve's Policy Outlook - The Federal Reserve is experiencing increasing internal divisions regarding future interest rate paths, with hawks focusing on the "strong economy" and doves emphasizing "weak employment." The current inflation rate is fluctuating between 2-3%, providing narrative space for both sides [4][43]. - Political factors and financial stability are identified as key variables influencing future Federal Reserve decisions. The upcoming changes in leadership within the Federal Reserve may enhance the influence of the Trump administration, potentially leading to a more dovish policy stance [4][55]. - The article predicts that by the end of 2026, the policy interest rate may drop to around 3%, corresponding to 3-4 rate cuts of 25 basis points each [4][56]. Market Implications - The article anticipates a continued bull steepening trend in U.S. Treasury yields, with the 10-year Treasury yield expected to decline from 4.3% to around 4.0% by 2026, while the yield curve will maintain its steepening characteristic [4][61]. - The U.S. dollar is projected to experience a phase of initial weakness followed by a potential recovery, with an overall oscillating trend expected, as the dollar index is forecasted to decline from 101 in 2025 to 99 by 2026 [4][69].