No rate cut for the Fed at the end of the month? "New Fed News" says December non-farm employment sets the stage for inaction, traders predict little chance in January.

The December non-farm payroll report appears to have completely dashed market expectations for a rate cut by the Federal Reserve at the end of this month. Although only 50,000 jobs were added in December and the data for the previous two months was significantly revised downward, the unexpected decrease in the December unemployment rate to 4.4% provides ample reason for the Federal Open Market Committee (FOMC) to keep rates steady. Following the release of the non-farm payroll report, Nick Timiraos, chief economics reporter for the Wall Street Journal, known as the "new Fed News Agency," commented that the report cleared the way for Federal Reserve officials to maintain their position at the January meeting. The decrease in the December unemployment rate from an initial estimate of 4.6% in November to 4.4% temporarily alleviated the most serious concerns about labor market deterioration. These concerns had prompted the Federal Reserve to cut rates at its previous three meetings, despite facing increasing dissent from a minority who believed that rate cuts were unnecessary. Bond traders reacted swiftly to the jobs report, nearly completely reversing bets on a rate cut in January. Following the report, U.S. Treasury bond prices fell across the board, with yields rising by as much as 3 basis points across different maturities. Interest rate swap markets indicated that the probability of a rate cut in January had fallen to zero, and traders currently expect the first rate cut of the year to occur in June following the end of Fed Chairman Powell's term, with a total cut of 50 basis points over the year, including two standard rate cuts. This data highlights the contradictory situation in the labor market: ongoing weak hiring alongside a decrease in the unemployment rate, making the Fed's decision-making path more complex. Job growth weakest since the pandemic, three-month average in negative territory The non-farm payroll report showed that only 50,000 jobs were added in December, below the Wall Street expectation of 65,000. Of particular concern is the downward revision of a total of 76,000 jobs for the previous two months, with the October figure revised from a loss of 105,000 jobs to a loss of 173,000 jobs, and November revised from an increase of 64,000 jobs to 56,000 jobs. Nick Timiraos pointed out that private sector hiring averaged just 29,000 over the past three months, marking the second-lowest level for the year. For the full year 2025, non-farm payrolls only increased by 584,000, the weakest annual performance since the loss of 9.2 million jobs due to the pandemic in 2020. Private sector job growth averaged 61,000 per month, the lowest level since the "jobless recovery" of 2003 outside of a recession. Analyzing by industry, healthcare added 21,000 jobs, leisure and hospitality also saw growth, while retail trade, construction, and manufacturing saw job losses. Five out of the 11 major industries experienced job declines. Nevertheless, wage growth remains resilient. Average hourly wages in December increased by 0.3% month-on-month, with the previous figure revised up to 0.2%. Wages increased by 3.8% over the past 12 months, approximately 1 percentage point higher than the inflation rate. Timiraos believes that the December non-farm payroll report solidified market expectations for the Fed to maintain rates at the January 27-28 meeting, as the weak job data suggests that the debate on the health of the labor market is far from over. Timiraos noted that the two FOMC voting members who will have voting rights in 2026 had earlier hinted that no action should be taken in the near future. Philadelphia Fed President Anna Paulson commented that if inflation cools down, it might be suitable to further cut rates later this year, but she also indicated that she is not in a rush to take action. Minneapolis Fed President Kashkari stated that he believes the Fed has lowered rates to near a "neutral" level that is difficult to observe, a level that neither stimulates nor depresses economic activity. Unemployment rate decrease closes door on rate cut The unexpected decrease in the unemployment rate was a key highlight of the December non-farm payroll report and the core reason for the Fed to stay put. The unemployment rate fell from 4.5% in November to 4.4%, below the expected 4.5%. It is worth noting that the initial estimate of the November unemployment rate was rounded up to 4.6%, and this report slightly revised it downward. Nick Timiraos analyzed that this decrease temporarily alleviated the most serious concerns about the deterioration of the labor market. While the weak recruitment data further proved that the debate on the health of the labor market is far from over, the employment report solidified expectations of the Fed staying put in January. The decrease in the December unemployment rate partly stemmed from a decline in the labor force participation rate to 62.4% that month. This indicates that some unemployed individuals have left the labor market and are no longer counted as part of the "actively looking for work" population. Unemployment rates for teenagers, Black individuals, and those without a high school education all decreased. Robert Tipp, chief investment strategist for fixed income at PGIM, stated, "This report keeps the Fed on track for more gradual rate cuts this year. They are at the top end of the neutral (rate) range, or the upper limit of that range. Therefore, they may feel that the current rate level has no impact on the economy and may consider skipping a meeting (rate cut)." Traders bet on rate cut delay until mid-year Following the data release, the U.S. bond market quickly repriced. The yield on the two-year Treasury note, which is sensitive to interest rates, rose by 3 basis points to 3.52% intraday on Friday, while the yield on the benchmark 10-year Treasury note increased to 4.17%. Traders maintained the expectation of a total rate cut of about 50 basis points for the year, but delayed the initial rate cut to June, with another possible cut in the fourth quarter. Subadra Rajappa, head of U.S. rate strategy at Societe Generale, stated, "The decline in the unemployment rate and the rise in wages support the Fed's decision to stay put in January." John Briggs, head of U.S. rate strategy at Natixis, remarked, "For us, the Fed will focus more on the unemployment rate than the noise in the overall (employment) numbers, so in my opinion, this is slightly bearish for U.S. rates." Anna Wong, economist at Bloomberg, stated that the December non-farm payroll data showed weak recruitment, with the downward revision of data over the past few months indicating weaker momentum than expected. The unusually cold weather in December may have had some impact on recruitment. More useful signals may come from the household survey showing robust hiring and the unemployment rate falling to 4.4%. Friday's jobs report may have surprised the Fed somewhat, but it is not enough to convince the FOMC to further cut rates. Wong predicted that the CPI report to be released next Tuesday, January 13, will show strong performance, further supporting the view that the Fed will not cut rates in the near future. She also believes that data after March will support the forecast of a 100 basis point rate cut this year. In the week leading up to the data release, major Wall Street banks, including Citigroup, JPMorgan, and Morgan Stanley, maintained their forecasts for a rate cut in January, but this expectation was completely dashed after the data release. The focus of Fed officials will now shift to inflation data and subsequent labor market performance to determine the pace and extent of rate cuts this year. This article is a repost from "Wall Street News," author: Li Dan; GMTEight editor: Liu Jiayin.