A hot December jobs report has many strategists confident that the Federal Reserve will hold off on further interest rate cuts for now.
And some on Wall Street think this report may have even cracked the door open for the Fed to consider rate hikes in 2025.
“Our base case has the Fed on an extended hold,” Bank of America Securities US economist Aditya Bhave wrote in a note to clients on Friday. “But we think the risks for the next move are skewed toward a hike.”
Bhave cautioned that the bar for the Fed to hike is high, with Fed officials still describing the current level of rates as restrictive. But should the Fed’s preferred inflation gauge — the Personal Consumption Expenditures metric, excluding volatile categories like food and energy — reaccelerate or inflation expectations move higher, a hike could be on the table.
The latest reading of “core” PCE showed prices increased 2.8% in November, higher than the 2.7% seen in October. There is also concern among economists that incoming President Donald Trump’s policies could push inflation higher or, at minimum, hold back inflation’s progress in slowing to the Fed’s 2% goal.
A fresh reading from the University of Michigan showed consumers’ year-ahead inflation expectations jumped to 3.3% in January from 2.8% the month prior. Meanwhile, long-run inflation expectations also hit 3.3% in January, the highest level for the metric since 2008.
“After a very strong Dec jobs report, we think the cutting cycle is over,” Bhave wrote. “Inflation is stuck above target, with upside risks.”
Read more: How the Fed rate cut affects your bank accounts, loans, credit cards, and investments
Data from the Bureau of Labor Statistics released Friday showed 256,000 new jobs were created in December, far more than the 165,000 expected by economists and higher than the 212,000 seen in November. Meanwhile, the unemployment rate fell from to 4.1% from 4.2% the month prior.
The cycle high for the unemployment rate had initially been 4.3% in July, a number that sparked investor concerns and contributed to a stock market sell-off in August. But that number was revised down 4.2% in Friday’s release, showing that while the labor market cooled throughout 2024, it isn’t deteriorating at a concerning pace.
“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,” Wells Fargo senior economist Sarah House wrote in a note to clients on Friday.
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With the labor market in solid shape, House believes the Fed not cutting interest rates when it announces its next decision on Jan. 30 is “all but assured.” And a March cut looks increasingly unlikely as well.
“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,” House wrote.
EY chief economist Gregory Daco agreed.
“I think the attention will actually pivot back towards inflation developments over the course of the next three months,” Daco told Yahoo Finance.
Daco is more sanguine on what those inflation prints could bring. He sees several low inflation readings leading to an interest cut in March before the Fed pauses to decipher how changes to fiscal policy could impact the inflation story. Markets are pricing in just one interest rate cut for 2025, per Bloomberg data.
Read more: Jobs, inflation, and the Fed: How they’re all related
Still, one thing is clear after Friday’s jobs report: The market is expected to be more focused on the incoming inflation data rather than labor market developments when deciphering whether or not the Fed will cut interest rates in 2025.
“Fed cuts are about inflation now,” Morgan Stanley chief US economist Michael Gapen wrote in a note to clients on Friday.
A fresh update will come next week with the release of the Consumer Price Index (CPI) for December. Wall Street economists expect headline inflation rose 2.9% annually in December, an increase from the 2.7% seen in November. Prices are set to rise 0.3% on a month-over-month basis, in line with the month prior.
On a “core” basis, which strips out food and energy prices, CPI is expected to have risen 3.3% over last year in December. This would mark the fifth straight month of a 3.3% annual reading for core inflation.
US Federal Reserve Chairman Jerome Powell gestures as he speaks at a press conference after the Monetary Policy Committee meeting in Washington, D.C., on Dec. 18, 2024. (ANDREW CABALLERO-REYNOLDS/AFP via Getty Images) · ANDREW CABALLERO-REYNOLDS via Getty Images
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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