US Unemployment Rate in December at 4.4%, Below Expectations

The US unemployment rate fell to 4.4% in December 2025, marking a decline from the revised 4.5% in November. This was below the market expectation of 4.5% and reflects a drop in the number of unemployed individuals by 278,000 to 7.50 million. The labor force shrank slightly by 46,000 to 171.50 million, reducing the labor force participation rate to 62.4%.

Employment increased by 232,000 to 163.99 million, signaling resilience in the labor market. The broader U-6 unemployment rate, which includes part-time workers and discouraged workers, also improved, falling to 8.4% from 8.7%. These figures highlight some easing in underlying labor market slack.

Meanwhile, the Federal Reserve faces continued balancing act between inflation and unemployment. Fed officials, including Richmond Fed president Tom Barkin, have emphasized the need for finely tuned policy responses given the risks to both sides of the central bank's dual mandate. Barkin noted that while unemployment remains low on a historical basis, it has ticked up, while inflation, although down, remains above target.

Why Did This Happen?

The labor force participation rate decline to 62.4% indicates that fewer people are actively participating in the labor market. This could signal a shift in economic behavior or demographic trends. The broader U-6 unemployment rate also offers insight into the labor market's health, as it includes those working part-time for economic reasons and those who have given up looking for work.

Employment gains were partially driven by the National Federation of Independent Business Small Business Survey's Hiring Sub-index, which has been trending higher since this summer. This trend may not be reflected in the December report but could point to a broader hiring acceleration.

How Did Markets React?

The release of the jobs data has implications for the Federal Reserve's interest rate decisions. Markets are currently pricing in a high probability of the Fed holding rates at its next meeting in late January. JPMorgan has outlined several scenarios for the December jobs report, with varying impacts on the S&P 500.

If the labor market added 75,000 to 100,000 jobs, analysts predict the S&P 500 could gain 0.25% to 1%. A smaller job gain of between 35,000 and 75,000 jobs could lead to a gain of 0.25% to 0.75%. Conversely, if the labor market added no jobs, the index could fall between 0.5% and 1.25%.

The dollar has already strengthened in anticipation of the report, with traders closely watching both the unemployment rate and payroll data. The yen and yuan have seen little movement, as the market remains cautious ahead of key economic releases.

What Are Analysts Watching Next?

Analysts are closely monitoring the labor market's resilience amid a backdrop of shifting trade and immigration policies. Barkin highlighted that while the economy has defied expectations of major disruptions, there are still downside risks. On the upside, he noted that the economy benefits from strong underlying dynamics, with real wages rising and corporate earnings remaining robust.

Looking ahead, the Congressional Budget Office (CBO) expects the Fed to cut rates in 2026, with the key interest rate projected to settle at 3.4% by the end of 2028. This projection assumes that inflation will remain above the 2% target, but will gradually improve over time.

Feed Governor Stephen Miran has also indicated that he anticipates 150 basis points of rate cuts in 2026 to strengthen the labor market. This projection aligns with the lowest forecast for the appropriate funds rate among the Fed's 19 policymakers.

Analysts from ING have noted that while the market is likely to show tolerance for a weak payroll number, the more impactful number may be the unemployment rate. This suggests that the Fed's focus will remain on both sides of its dual mandate.

Investors are also watching the broader economic landscape, including geopolitical risks and potential policy shifts. The Supreme Court's ruling on President Trump's emergency tariff powers could have significant implications for trade policy and investor sentiment.

The UK labor market is also under scrutiny, with a surge in job cuts fueling pressure for further rate cuts by the Bank of England. Meanwhile, the UK economy is expected to grow modestly in 2026, but at a pace below long-term averages.

As the year progresses, markets will remain attentive to key data points, including the December nonfarm payrolls report, and how they influence central bank policy and investor sentiment.