Key Takeaways

  • U.S. employers added far more jobs than expected last month, leading investors to predict that the Federal Reserve will maintain its current benchmark interest rate after its May monetary policy meeting.
  • Data released by the Labor Department on Friday showed the unemployment rate fell to 4.1% from 4.2%, with the economy adding 256,000 jobs and a three-month average of 170,000. The unemployment rate and labor force participation rate have fluctuated within a narrow range for at least seven consecutive months, indicating continued stability in the labor market.
  • "The December employment report was strong," said Aditya Bhave, U.S. economist at BofA Securities, in a client note. "Our base case is that the Fed will extend its pause on rate cuts," he added, "and the risk to the next policy move is tilted toward a hike."

Deeper Dive

Interest rate futures traders, reacting to the largest job growth since March, raised the probability that the Fed will hold rates steady after its two-day meeting ending May 7 to 67% from 45%, according to data from the CME Group's FedWatch tool.

A second sign that investors are tempering expectations for monetary easing: the benchmark 10-year U.S. Treasury yield rose to 4.793% on Friday, up from 4.519% on December 18, when policymakers cut the federal funds rate by 25 basis points to a range of 4.25% to 4.5%.

The Fed cut rates by a total of 1 percentage point across three consecutive meetings late last year.

"Concerns about a sharp deterioration in labor market conditions, which prompted the Fed to begin cutting rates in September, have now largely dissipated, and a slowdown in the pace of Fed rate cuts seems fairly certain," Brian Coulton, chief economist at Fitch Ratings, said in an email.

"The overall picture is broadly stable," Coulton said of the job market.

Chicago Fed President Austan Goolsbee said after the data release that the employment report indicates labor demand and the number of job seekers are moving toward balance.

"This is a strong jobs report," Goolsbee said in an interview with CNBC. "It reinforces my confidence that the job market is stabilizing near full employment," he said, adding that the data is "not a sign of overheating."

Despite signs that the Fed's nearly three-year effort to bring inflation down to its 2% target has stalled, policymakers lowered borrowing costs last month.

Compared with September projections, Fed officials raised their median forecast for the personal consumption expenditures price index at the end of 2024 to 2.8% from 2.6%, and raised the forecast for the end of this year to 2.2% from 2%.

Meanwhile, Joanne Hsu, director of the University of Michigan's consumer survey, said long-run consumer inflation expectations rose to 3.3% this month from 3.0% in December.

"This is the third time in the past four years that long-run expectations have seen such a large one-month change," she said in a statement on Friday.

Hsu also noted that consumers' inflation expectations for the year ahead "surged to 3.3% in January from 2.8% last month. The current reading is the highest since May 2024 and above the 2.3% to 3.0% range seen in the two years before the pandemic."

Coulton said the Labor Department's December wage growth data released on Friday should provide some comfort to policymakers regarding price pressures.

"Against the backdrop of recent concerns about rising inflation, the monthly wage increase slowed to 0.28% month-over-month from 0.37% in November, and the Fed will take some comfort from that," he said, referring to the Labor Department data.