A robust December jobs report has bolstered confidence among strategists that the Federal Reserve will maintain its current interest rate levels. Some analysts even suggest this report might signal the possibility of rate increases in 2025.
Bank of America Securities US economist Aditya Bhave stated in a client note, “Our base case has the Fed on an extended hold. But we think the risks for the next move are skewed toward a hike.”
While acknowledging the high threshold for a Fed rate hike, with officials still viewing current rates as restrictive, Bhave cautioned that a reacceleration in the core Personal Consumption Expenditures (PCE) index or rising inflation expectations could prompt a hike. November’s core PCE showed a 2.8% increase, up from 2.7% in October. Economists also express concern that incoming President Donald Trump’s policies might fuel inflation or hinder its decline toward the Fed’s 2% target.
The University of Michigan’s recent data revealed a jump in consumers’ year-ahead inflation expectations to 3.3% in January, from 2.8% in December. Long-run inflation expectations also reached 3.3% in January, the highest since 2008. Bhave concluded, “After a very strong Dec jobs report, we think the cutting cycle is over. Inflation is stuck above target, with upside risks.”
The Bureau of Labor Statistics reported a significant 256,000 new jobs in December, exceeding economists’ expectations of 165,000 and surpassing November’s 212,000. The unemployment rate dropped to 4.1% from 4.2%. The cycle high unemployment rate, initially 4.3% in July, was revised down to 4.2%, indicating a cooling but not alarmingly deteriorating labor market.
Wells Fargo senior economist Sarah House noted, “From the Fed’s perspective, the unemployment rate started the year in ‘too hot’ territory at 3.7%, but it has cooled to ‘just right’ at 4.1% in December.” Given the robust labor market, House believes a Fed rate cut on January 30th is highly improbable, with a March cut also looking less likely. She added, “It will take a further slowdown in inflation or much weaker labor market data for the FOMC to resume cutting rates over its next few meetings.”
EY chief economist Gregory Daco concurred, stating, “I think the attention will actually pivot back towards inflation developments over the course of the next three months.” Daco anticipates low inflation readings could lead to a March rate cut before the Fed assesses the impact of fiscal policy changes on inflation. Current market expectations, according to Bloomberg data, predict only one rate cut in 2025.
The December jobs report underscores a shift in market focus towards inflation data, rather than labor market trends, in anticipating Fed rate decisions in 2025. Morgan Stanley chief US economist Michael Gapen affirmed, “Fed cuts are about inflation now.”
The upcoming Consumer Price Index (CPI) for December will provide further insight. Economists project a 2.9% annual headline inflation increase in December, up from 2.7% in November, with a 0.3% month-over-month rise. Core CPI, excluding food and energy, is expected to remain at 3.3% for the fifth consecutive month.
