Strong December Jobs Report Kills Chances Of A January Fed Rate Cut

The December jobs report revealed a drop in the unemployment rate to 4.1%, accompanied by a rise and acceleration in monthly net non-farm payroll gains of 256,000. Before the jobs report was released, the odds were already low for an interest rate cut in the next Federal Reserve decision on January 29. However, the strong December jobs report is the nail in the coffin for January rate cut expectations. With solid labor market data and near-term risks of an acceleration in year-on-year consumer inflation rates, the next Fed rate cut may not happen until May 2025.

December Jobs Report Shows Payroll Rebound

The Employment Situation report, known to economists and analysts as the jobs report, was solid for December 2024. It reaffirmed that the labor market is on solid footing and that recession is not an imminent risk. It also reduced the chances of an interest rate cut by the Federal Reserve on January 29.

On the upside, the unemployment rate fell modestly to 4.1% from 4.2% as December payrolls reflected a net increase of 256,000 jobs. Total U.S. payrolls are now at a record high of more than 159.5 million jobs.

A solid December payroll gain was widely expected, but this report exceeded expectations.

In addition to the payroll gain for December, there were only modest net downward revisions of 8,000 jobs to the previous two payroll figures, with an upward revision of 7,000 jobs for October but a downward revision of 15,000 jobs for November.

Other data in the jobs report was also strong, including a rise in the Household Survey employed series, which rose by 478,000 as the unemployed series fell by 235,000.

While the December jobs report supports the claim that the U.S. labor market is relatively solid, other recent data also reinforce this notion. After all, initial and continuing jobless claims are very low. Continuing claims are at 1.867 million, which is only around 1.1% of the labor force. Initial jobless claims are also very low, at just 201,000.

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Strong Job Openings and Labor Turnover Survey data showed that there were almost 8.1 million open jobs in November 2024. While that figure is roughly 4.1 million fewer open jobs than the historic high in March 2022 of 12.2 million, 8.1 million open jobs would have been a record high before the COVID-19 pandemic. With a difference of around 6.2 million open jobs versus people collecting unemployment, it is difficult to expect very large net payroll losses across multiple months anytime soon.

According to Prestige Economics — which was ranked the most accurate U.S. unemployment rate forecaster in the world for a second consecutive quarter, according to Bloomberg’s latest quarterly rankings — the U.S. unemployment rate is likely to rise modestly on trend in 2025 while remaining relatively low.

Anticipating December Consumer Inflation After The Jobs Report

The Fed has a dual mandate to support full employment and keep inflation rates low and stable. The December jobs report, November JOLTS data, and recent weekly jobless claims reflect full employment in the U.S. labor market. However, consumer prices are not yet low and stable. Nor are consumer inflation rates yet at the Fed’s 2% inflation target.

Year-on-year consumer inflation rates accelerated in November for the Consumer Price Index, Personal Consumption Expenditures inflation, and PCE core inflation.

November year-on-year consumer inflation rates are elevated, with total CPI at 2.7%, core CPI at 3.3%, total PCE inflation at 2.4%, and core PCE at 2.8%. Year-on-year total CPI and PCE consumer inflation rates are likely to fall to the Fed’s 2% target in 2025, but they are currently above target—and core inflation rates could remain above the Fed’s 2% for most or even all of 2025.

Due to such elevated inflation rates, no change in Fed policy is likely on January 29. However, Prestige Economics expects the next 0.25% interest rate cut could come in May 2025 due to a likely slowing in U.S. year-on-year total CPI and total PCE consumer inflation rates in Q2 2025.

Fed Implications Of The December Jobs Report

Some data in the December jobs report indicate that the U.S. labor market has slowed, including the three-month average of total private payroll gains, which remained at a modest 138,000 for a second consecutive month.

The Fed wants to avoid further labor market slowing, which is why the Federal Open Market Committee cut rates by 0.25% in its December 18 policy decision. However, the Fed may have done enough for the moment.

Prior to the release of the December jobs report, the CME FedWatch Tool put the odds of a 0.25% Fed rate cut on January 29 at 6.9% as of 8:06 a.m. on January 10. After the jobs report was released, the odds of a 0.25% Fed rate cut on January 29 fell to just 2.7% as of 9:36 a.m. ET on January 10. While a 2.7% probability is not precisely zero, most economists assess that a statistical probability below 5% is essentially zero.

Additional interest rate cuts are likely in 2025 and 2026, although the latest December 2024 FOMC projections reflect expectations of only two 0.25% rate cuts in 2025.

Market Implications Of The December Jobs Report And The Forthcoming December CPI Inflation Report

This report is disappointing for those anticipating more interest rate relief because payrolls improved more than expected while the unemployment rate fell.

Markets are likely to interpret this month's jobs report as a sign that the labor market is solid and recession risks are low. While the labor market has slowed over the past two years, the December jobs report does not support a change in Fed interest rate policy on January 29.

An above-consensus rise and acceleration in payrolls with reduced recession risks and lower chances of Fed interest rate cuts are likely to support bond yields and the dollar while weighing on bond prices, equities, and some industrial commodity prices.

Looking ahead to the December U.S. CPI inflation report on January 15, there are risks of a further acceleration in year-on-year total and core CPI inflation rates due to base effects.

According to Prestige Economics, accelerations in year-on-year total and core CPI inflation rates would impact expectations for Fed policy, further reducing the odds of interest rate cuts in 2025 to as low as just one 0.25% rate cut.

Such low rate cut expectations could send the dollar and bond yields even higher while further weighing on equity prices, bond prices, and industrial commodity prices.

Looking out a few months, year-on-year total CPI and total PCE inflation rates could ease in Q2 2025 due to base effects, which could cause the dollar and bond yields could fall in Q2 while supporting equities, bond prices, and industrial commodity prices.

What do you think about today’s jobs report and payrolls?

Let me know in the comments below.

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