The robust U.S. jobs report for December, revealing a surprising 256,000 job increase, has prompted leading Wall Street brokerages to reassess their Federal Reserve rate cut projections. Notably, BofA Global Research has even suggested a possible rate hike in the future.
BofA analysts, in a recent note, stated their belief that the cycle of rate cuts has concluded. Their primary forecast anticipates an extended period of unchanged rates from the Fed. However, they highlight a growing risk of a potential rate increase as the next move.
December’s nonfarm payroll figures significantly exceeded expectations. The reported increase of 256,000 jobs was the highest since March. Furthermore, revised data for October and November showed 8,000 fewer jobs added than initially reported. Economists polled by Reuters had projected a more modest increase of 160,000 jobs, with estimates ranging between 120,000 and 200,000.
Despite the strong jobs data, market sentiment, as reflected by the CME FedWatch tool, still indicates a 76.31% probability of a 25 basis point rate cut by the Fed in June.
Responding to the December jobs report, both J.P.Morgan and Goldman Sachs have shifted their projected timelines for a Fed rate cut to June, having previously anticipated a cut in March. J.P. Morgan analysts noted that a series of significantly negative jobs reports would be necessary to prompt the Federal Reserve to resume easing monetary policy by March.
Wells Fargo concurred, stating that a March rate cut appears increasingly improbable. ING also weighed in, suggesting that the prevailing environment of persistent inflation increases the likelihood of an extended pause in rate adjustments by the Fed. Morgan Stanley acknowledged that the jobs report diminishes the probability of near-term rate cuts. However, they maintained their view that a March cut remains slightly more likely than not, citing their optimistic inflation outlook.
In conclusion, the December jobs report has significantly altered expectations regarding the Federal Reserve’s monetary policy trajectory. While market participants still anticipate a rate cut in June, prominent financial institutions have pushed back their projections, and BofA has even raised the possibility of a future rate hike. The Fed’s ultimate course of action will likely hinge on upcoming economic data and the evolving inflation landscape.
