Strong December job growth could augur fewer Fed interest-rate cuts. Here's why.
Employers added 256,000 jobs in December, blowing past economists' expectations and signaling that the job market remains resilient in the face of still-high borrowing rates and stickier-than-expected inflation.
The economy was expected to add 153,000 jobs last month, according to economists polled by financial-data firm FactSet. The unemployment rate in December stepped down to 4.1%, lower than the forecast that the rate would remain steady at 4.2%.
Hiring was strongest in the health care, government and social assistance industries, the Bureau of Labor Statistics said Friday. Retail companies also added jobs last month, after a decline in November.
The Jan. 10 jobs report marks the last monthly employment snapshot of the Biden administration, which inherited an economy scarred by the pandemic. When Biden was inaugurated in January 2021, the jobless rate stood at 6.4%, while inflation was about to soar to 40-year highs, kicking off a flurry of interest rate hikes from the Federal Reserve to tame price increases.
Under the Fed's restrictive monetary policy, the economy has cooled, dampening inflation but also creating some cracks in the labor market. At the same time, the incoming Trump administration's policies, if enacted, are expected to be inflationary, prompting some economists to predict that the central bank may hold off on cutting rates at its January 29 meeting.
Fewer Fed cuts?
The robust jobs report may also ease pressure on the Fed to continue to cut rates, given the Fed Chair Jerome Powell had cited some earlier signs of weakness in the labor market as one reason why the central bank began cutting rates in September.
"The solid December employment report will solidify the Fed's intentions to proceed with the slower pace of interest rate cuts it signaled at its December meeting," Nancy Vanden Houten, lead U.S. economist at Oxford Economics, said in a report. "Officials have been a bit disappointed at the uneven pace of progress in lowering inflation, and the data should ease any fears that keeping rates on hold will pose a significant risk to the labor market."
The Fed in December trimmed its benchmark for a third straight month amid signs that the economy was gearing down. The central bank is now penciling in only two rate cuts in 2025, down from the four it had forecast in September when it last issued economic projections.
Some economists think the Fed could lower borrowing costs one once in 2025, while others expect more cuts.
"Our own baseline continues to assume three rate cuts this year, one more than signaled by the Fed, with the first to come in March,"Vanden Houten said. "The December report increases the risk that the Fed will remain on hold in March and that we only see two cuts this year, particularly if policies on tariffs and immigration implemented by the incoming Trump administration are more inflationary than currently incorporated in our baseline."
