Strong US Jobs Report Strengthens Case for Fed Rate Cut Pause
The comments below are an edited and abridged synopsis of an article by Augusta Saraiva, Bloomberg News (with assistance from Chris Middleton, Molly Smith, Nazmul Ahasan, Maria Clara Cobo and Ye Xie)
(665 words, 4 minutes read time.)
The latest US jobs report is reaffirming what Federal Reserve officials have indicated in recent weeks: The likelihood of interest rate cuts in the near future is diminishing.
In December, nonfarm payrolls rose by 256,000, marking the largest monthly increase since March and surpassing most forecasts in a Bloomberg survey. The unemployment rate unexpectedly dropped to 4.1%, and average hourly earnings increased by 0.3% from November, according to the Bureau of Labor Statistics.
This positive labour market data caps off a year of surprising strength, with the US economy adding 2.2 million jobs in 2024, despite ongoing challenges such as high borrowing costs and inflation. While the pace of job creation slowed compared to 2023, when 3 million jobs were added, the figure for 2024 remains above the 2 million created in 2019.
Additionally, the unemployment rate saw some important revisions. The peak rate in July, originally reported as 4.3%, was revised downwards, indicating that the labour market was more resilient over the summer than initially thought. This shift suggests a stronger-than-expected labour market, prompting analysts to reconsider expectations for aggressive rate cuts in the coming months.
Brian Rose, a senior economist at UBS Global Wealth Management, commented, “Given the overall strength of the recent economic data, there is little reason for the Fed to consider cutting rates anytime soon. This will require softer data on both the labour market and inflation in the months ahead.”
This data aligns with the Fed’s cautious stance. Their projections in December suggested only two rate reductions in 2025, as they continue to grapple with inflationary pressures. Markets reacted by scaling back their expectations for rate cuts, with key inflation data set to be released next week offering further insight into the direction of inflation as the Fed’s next policy meeting approaches on January 28-29.
At the same time, a report from the University of Michigan showed that longer-term inflation expectations among consumers have risen to the highest levels since 2008. This suggests that inflation remains a key concern, potentially impacting the Fed’s decision-making.
December’s job growth was largely driven by sectors like healthcare, social assistance, retail trade, and leisure and hospitality. However, manufacturing showed weakness, with a fourth consecutive month of job losses, amounting to 87,000 job reductions over the course of 2024.
The labour force participation rate, which reflects the share of the population working or seeking work, remained steady at 62.5%. Interestingly, there was a decrease in the number of people who lost their jobs permanently, while more individuals voluntarily left their positions, pointing to a somewhat more fluid job market.
Wage growth continues to be a focus for central bankers. Average hourly earnings grew by 3.9% year-on-year in December, while earnings for nonsupervisory employees increased by 0.2% from November, marking the slowest annual growth since mid-2021.
While Chicago Fed President Austan Goolsbee expressed that the strength in hiring does not signal an overheating economy, he acknowledged that he still expects interest rates to be significantly lower over the next 12 to 18 months, provided inflation doesn’t rise further.
Bloomberg economists noted that the December jobs report was solid, suggesting the job market may be stabilizing after deterioration in the second half of 2024.
Looking ahead, as the Fed continues to monitor both the labour market and inflation, the data indicates that any rate cuts will likely remain distant until there is clearer evidence of inflation easing.