Jobs report will test Fed interest rate cut plans

Friday, 10 January 2025

Jobs report will test Fed interest rate cut plans

by BD Banks

The job market likely remained firm in December, according to Wall Street forecasts and recent data heading into the employment report due Friday adds headwinds for more Federal Reserve interest-rate cuts in 2025.

The consensus analyst forecast says the economy likely added around 164,000 new jobs last month, a slower pace than November but solid enough to round out the year with a net gain of around 2.15 million jobs.

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Wage gains are expected to moderate, however, as the job market undergoes a “no hire, no fire” transition: Companies are reluctant to lose existing workers but aren’t confident enough of their near-term economic outlooks to pay higher salaries for new employees.

*Fed Chair Jerome Powell has said the job market isn’t stoking inflation. But its recent weakness could still prompt policy changes.*

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Earlier this week, payroll-processing giant ADP published its National Employment Report for December, showing a smaller-than-expected gain of 122,000 jobs, and the slowest year-on-year wage gains since July 2021.

Labor-market growth ‘downshifted’: ADP

“The labor market downshifted to a more modest pace of growth in the final month of 2024, with a slowdown in both hiring and pay gains,” said ADP’s chief economist, Nela Richardson.

Analysts are looking for monthly wage gains of around 0.3% from the Labor Department’s report, a tick lower than the 0.4% pace recorded in November.

On a headline basis, economists expect the unemployment rate to hold at 4.2%, a level that would peg the 2024 monthly average at around 4.04%.

Labor-market momentum also looks solid, with companies undergoing few job cuts into year-end, according to Challenger, Gray & Christmas data.

The firm calculated just under 39,000 layoffs in December, a 33% decline from the prior month, and a fourth-quarter tally of just over 152,000, which was down 13% from the year-earlier period.

But that momentum is being met with near-term uncertainty.

“Companies underwent extraordinary change in 2024 due to rapid technological advancement and shifting economic condition,” said Andrew Challenger, workplace expert and senior vice president of Challenger, Gray & Christmas.

“Most employers are anticipating additional uncertainty with the upcoming administration, which is leading to slower hiring and more layoffs in the short term from various sectors,” he added.

Uncertainties for 2025 are piling up

The Fed underscored that uncertainty during its December rate cut debate, according to minutes of the meeting published Wednesday. But, the central bank hinted that likely policy changes from President-elect Donald Trump, not the domestic economy’s broader resilience, will stoke inflation.

Fed interest-rate officials “noted that recent higher-than-expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the process could take longer than previously anticipated,” according to minutes from the Dec. 18 decision.

At present, CME Group’s FedWatch is pricing in only one quarter-point rate cut between now and the end of the summer, with that one likely arriving in May.

The Fed’s dual mandate to deliver price stability alongside full employment could be tested, however, if the job market were to weaken while inflation pressures, tied to Trump tariff and tax policies, remain elevated.

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“Policymakers at the Fed will tread carefully in 2025,” said Lydia Boussour, EY senior economist.

“Following a cumulative percentage point of policy easing in 2024, we believe the Fed will decide to slow the recalibration process as policymakers feel their way to a neutral policy stance and navigate potential policy shifts and the associated upside risks to the inflation,” she added.