US Fed Pauses Rate Cuts Amid Strong Job Growth

The US economy continued to add new jobs at a healthy clip in December, with the latest jobs report likely cementing the Federal Reserve pausing interest rate cuts.

The US economy added 256,000 jobs in December, according to the latest report from the Bureau of Labor Statistics released Friday morning. The December gain was well above economists’ expectations, with the consensus forecast calling for a rise of 153,000 in nonfarm payroll employment, according to FactSet. Meanwhile, the unemployment rate held steady at 4.1%.

In the wake of the report, traders believe it’s a near certainty that the Fed will keep interest rates steady at its January policy meeting. With the labor market stable, the central bank could potentially keep rate cuts on hold through mid-year. The Fed has cut rates at its last three meetings, taking the key interest rate target range to 4.25%-4.50%.

“The labor market remains stable, supporting the idea the Fed will keep rates unchanged in its January meeting,” says Preston Caldwell, senior US economist at Morningstar.

December Jobs Report Key Stats

Total nonfarm payrolls rose by 256,000 versus a downward-revised 212,000 in November.The unemployment rate ticked down to 4.1% from 4.2% in November.Average hourly wages rose by 0.3% to $35.69 after rising 0.4% in November.

Hiring on a Steady Course

With the December report, job growth has averaged a healthy 170,000 per month over the last three months, even with the October distortions caused by strikes and hurricanes. Caldwell notes that equals an annualized growth rate of 1.3%. The three-month growth rate in nonfarm payroll employment stands at 1.3% annualized. “Factoring in the preliminary benchmark revision, which will be incorporated in a revision of the official data next month, we estimate an adjusted three-month growth rate of 1.0%,” he says. “That’s about in line with the 1.1% average since the second half of 2023. On a year-over-year basis, nonfarm payroll adjusted growth has held steady at 1.1% for the past six months.”

According to the BLS, hiring rose in healthcare, government, and social assistance. In addition, retail added jobs in December, following a loss in November.

Unemployment Rate Stable

Meanwhile, the unemployment rate changed little in December at 4.1%. “After increasing earlier in the year, the unemployment rate has been either 4.1% or 4.2% for the past seven months,” the BLS noted. “The number of unemployed people, at 6.9 million, also changed little.”

Caldwell says that while the selloff in the bond market after Friday’s jobs data suggests “some market participants would characterize today’s report as particularly strong, that doesn’t seem accurate, even as a few indicators such as the unemployment rate moved in a stronger direction from November to December on a month over month basis.”

He notes that he and Fed officials generally focus on three-month or longer time horizons to smooth out the month-to-month noise. “Indicators on that horizon remained stable in the latest report. To be sure, these numbers further erode any fears that the labor market may have been deteriorating. The unemployment rate had drifted up from a three-month average of 3.6% as of August 2023 to 4.2% in August 2024, triggering the ‘Sahm Rule’ recession indicator. Nonfarm payroll (adjusted) three-month growth dipped to 0.6% annualized as of August 2024. But since then, the unemployment rate has moved sideways, and nonfarm payroll growth has bounced back.”

No Sign of a Too-Hot Jobs Market

Despite the stronger-than-expected reading on hiring, Caldwell doesn’t see any signs of overheating. In December, average hourly wages rose by 10 cents, or 0.3%, to $35.69. Over the past 12 months, average hourly earnings have risen 3.9%

“We don’t see much sign the labor market is getting or staying too hot,” he says. “As of December, growth in private average hourly earnings stood at 4.0% year-over-year, which is within range of the 3.5% level consistent with 2.0% inflation.”

Will the Fed Cut Rates?

For now, at least, the jobs report appears to have put rate cuts on hold. According to the CME FedWatch tool, bond futures traders don’t see a meaningful chance of the Fed lowering rates again until June. At their December meeting, Fed officials signaled they expect two rate cuts in 2025, down from four when they last released forecasts.

“Overall, the Fed has no reason to veer from the widely expected choice of keeping rates unchanged in its upcoming January meeting,” says Caldwell. “A resumption of cuts in March and beyond will require further progress on inflation, although a renewed softening in the labor market or economic activity could help.”

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

Source link