December Jobs Report: Why Rate-Cut Odds Are Dented, Not Broken

The December jobs report delivered a clear signal: the labor market is cooling, but not collapsing. The headline figure was a 50,000 gain in nonfarm payrolls, falling short of the median economist forecast of 70,000 and marking the weakest monthly gain in years. This soft print capped a year of deceleration, with full-year 2025 average monthly payroll growth of just 49,000-the slowest annual pace outside of a recession. The data paints a picture of a market in structural retreat, not a sudden shock.

The puzzle lies in the unemployment rate, which fell to 4.4% from 4.5% in November. This decline masks underlying weakness, as it was driven by a decline in the labor force participation rate rather than robust hiring. More telling are the significant downward revisions: October's job loss was revised to 173,000 from 105,000, and November's gain was revised down by 8,000. These adjustments confirm that the labor market was weaker at the end of 2025 than initially estimated, reinforcing the narrative of a persistent slowdown.

This is the setup for a "no-hire, no-fire" economy. Hiring has dried up, but layoffs have not surged, creating a state of stagnation where workers feel insecure. Americans' perceived probability of finding a job if they lost their own fell to a record low of 43.1% in December. The market's immediate reaction to this data was a dent in rate-cut expectations. The Fed, which had been moving toward easing after a series of hikes, now faces a more complex trade-off. The cooling job market supports the case for cuts, but the resilience in the unemployment rate and the broader strength in consumer spending and GDP growth suggest the economy is not yet in distress.

The bottom line is that the report has dented, but not broken, the market's expectation for a Fed rate cut. It has shifted the narrative from one of overheating to one of a fragile, cooling equilibrium. The Fed can now afford to wait, gathering more evidence on whether this soft landing is sustainable or a prelude to deeper trouble. For now, the data supports a patient, data-dependent approach.

Market and Policy Reaction: Pricing in a Wait

The market's verdict on the December report was one of measured relief, translating the data into a concrete shift in policy expectations. The immediate reaction was a clear signal that the Fed's next move is likely to be a pause. According to pricing from Fed funds futures, there is now an 88.4% probability the Fed will hold rates steady at its meeting at the end of January. This is the market's direct translation of the data: a labor market cooling but not collapsing, which removes the urgency for an immediate cut.

The market's price action reflected this nuanced read. U.S. stock futures rose, with some analysts viewing the report as "not too hot, not too cold" and thus supportive of a "bullish reaction" as traders see room for future Fed easing. Yet the bond market showed a more cautious hand. Treasury yields briefly extended their rise before paring gains, with the benchmark 10-year yield settling flat. The dollar index also trimmed its gains. This choppiness underscores the market's wait-and-see stance-there is enough softness to justify eventual cuts, but not enough distress to demand one this month.

This is the essence of the "no-hire, no-fire" economy. Weak hiring is being offset by historically low layoffs, as evidenced by the lowest level of announced job cuts in 17 months in December. This creates a state of stagnation that is politically and economically palatable for the Fed. It allows the central bank to maintain its pause, gathering more evidence on whether this soft landing is sustainable or a prelude to deeper trouble. As one economist noted, the report "should mean that the Fed will continue to eye the labor market before cutting rates in the first quarter." The data has been priced in, and the consensus is that the Fed will wait.

Forward Scenarios: The Path to a Cut

The current equilibrium is fragile. The Fed's wait is justified by the data, but the path to a rate cut hinges on whether this "no-hire, no-fire" state begins to unravel. The key risk is a feedback loop where weak hiring leads to lower consumer spending, which in turn pressures businesses to cut more jobs, accelerating the slowdown. This dynamic is already visible in consumer sentiment, where the perceived probability of finding a job if they lost their own fell to a record low of 43.1%. When workers feel insecure, they spend less, creating a self-reinforcing cycle that could force the Fed's hand.

Monitoring incoming data is critical. The market's patience will be tested by the next few monthly payrolls and, more importantly, weekly jobless claims. A sustained pickup in claims or a series of payrolls consistently below 30,000 would signal that the "low-hire, low-fire" mode is breaking down into a more dangerous stagnation. Conversely, a return to more robust hiring, perhaps supported by the higher hiring plans noted in December, could reinforce the view that the worst is behind us and justify further patience. The average monthly payroll growth of maybe 30,000 in the quarter is a key benchmark; staying near that level keeps the Fed on hold, while a clear drop below it would shift the calculus.

Finally, watch for any shift in the Fed's communication. The central bank's language at its next meeting will be a reaction to the incoming data. If officials begin to explicitly cite the cooling labor market as a reason to cut, it would signal that the wait is over. For now, the market's pricing of an 88.4% probability the Fed will hold rates steady at its end-of-January meeting reflects a belief that the data will remain in a "not too hot, not too cold" zone. The path to a cut is not a single event but a series of signals that the fragile equilibrium is tilting toward a more urgent need for policy support.