The Buffer Is Gone Why the Fed Must Act
The US labour market is still widely described as cooling in an orderly way. Payroll growth has slowed, vacancies have fallen and unemployment has risen only modestly. But that reading misses the more important signal. The economy has reached a point on the Beveridge Curve where further weakening in labour demand is unlikely to remain painless. The buffer that once allowed vacancies to fall without job losses has largely been exhausted, leaving the market far more sensitive to small changes in demand.
The Beveridge Curve, the relationship between unemployment and job vacancies, matters because it describes how labour markets adjust during slowdowns. In normal cycles, weaker demand shows up first in fewer vacancies, then slower hiring, and only later in higher unemployment. That sequencing held for much of the post-pandemic period. Between 2022 and early 2024, vacancies collapsed while unemployment barely moved. The economy slid almost vertically down the curve, easing wage pressure without triggering layoffs. This unusual phase became known as “immaculate disinflation”.
That phase has now ended. By late 2025, the vacancy-to-unemployed ratio has returned to around one-to-one, close to historical norms. In Beveridge Curve terms, the economy has reached the knee, the point where the curve flattens and trade-offs reassert themselves. From here, further reductions in labour demand no longer show up mainly as fewer job adverts. They increasingly show up as higher unemployment, because firms have already pulled back hiring as far as they comfortably can.
This vulnerability is reinforced by the frozen state of the labour market itself. Hiring rates have fallen back to pre-pandemic lows, while layoffs remain subdued. Companies, still wary after the recruitment shortages of 2021 and 2022, are reluctant to fire, but they are no longer adding staff either. The result is a “low hire, low fire” equilibrium in which unemployment appears stable, yet job-finding prospects for the unemployed and for new entrants have deteriorated sharply. The market can look healthy in the aggregate even as mobility dries up and the cost of losing a job quietly rises.
Vacancy data can also mislead. In recent years, a large share of openings reflected poaching rather than genuine hiring; firms competing for already-employed workers rather than expanding overall employment. As that behaviour fades, remaining vacancies increasingly represent real labour demand. When those vacancies decline, the effect on unemployment is faster and more direct than markets have become used to.
This is why Jerome Powell’s recent framing matters. Speaking in October, he noted that the economy had enjoyed “an amazing time” coming down through vacancies with limited damage to employment, but warned that the next phase would be different, with further declines in openings more likely to show up in unemployment. It was a clear acknowledgement that the labour market is no longer forgiving.
For bond markets, the implication is not about renewed easing but about timing. With the labour market now sitting at the knee of the Beveridge Curve, a cautious or overly gradual easing path risks arriving too late. The economy has moved from painless adjustment to fragile balance. If demand softens even modestly, unemployment is likely to rise more quickly than recent experience suggests, and the pace of rate cuts may prove quicker, and less optional, than markets expect.
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