After US Jobs Data Release, Probability of Fed Rate Cut in January Further Decreases

The probability of a Federal Reserve rate cut at its January 2026 meeting has dropped further as recent employment data and forecasts point to a tighter labor market. Futures markets now assign an 83.9% chance of no rate change, with just 16.1% pricing in a 25 basis point reduction. Analysts are closely watching the U.S. ADP private payrolls report due later in the week, which is expected to show 45,000 new jobs in December.

The broader jobs market is under scrutiny as Fed policymakers assess whether the labor market is cooling enough to warrant further easing. The upcoming nonfarm payrolls report on Friday will be critical in shaping expectations. Economists forecast 73,000 jobs added in December, with the unemployment rate dropping to 4.5% from 4.6% in November.

Federal Reserve Governor Stephen Miran has stated that monetary policy is "holding the economy back" and that the central bank will need to cut rates by more than a percentage point this year. However, with the U6 underemployment rate rising to 8.7% in November, the Fed faces a challenging balance between labor market strength and inflation concerns.

Why Did This Happen?

Recent economic data has tempered expectations for an aggressive rate-cutting cycle in early 2026. The ADP report is expected to provide a clearer picture of the labor market's resilience, particularly after the government shutdown in late 2025 distorted some previous readings. The JOLTS job openings report will also offer insights into the demand side of the labor market.

The Fed's focus remains on employment data as it evaluates whether to cut rates further. The U6 measure, which includes part-time and discouraged workers, rose to 8.7% in November—the highest in over four years—raising concerns about the true state of labor market slack.

How Did Markets React?

Financial markets have priced in a cautious Fed stance, with U.S. rate futures reflecting a strong likelihood of no January rate cut. The probability of a 25 basis point cut has fallen to 16.1%, while the chance of a full rate hold remains at 83.9%. Prediction markets, such as Polymarket and Kalshi, also show a similar consensus, with over 90% of bets favoring a hold.

Investors are now shifting attention to the broader economic environment. According to MUFG Bank's Lee Hardman, the U.S. dollar has seen limited gains unless Friday's nonfarm payrolls report provides strong enough evidence to reassess rate-cut expectations. This uncertainty has led to a more defensive stance across asset markets.

What Are Analysts Watching Next?

The upcoming nonfarm payrolls report on Friday will be a key event for investors and policymakers. Economists expect a dip in the unemployment rate to 4.5% and 73,000 new jobs added in December. If these expectations are met, it would support the case for a more gradual approach to rate cuts.

Another critical factor is the U6 underemployment rate. This metric has risen significantly in recent months, suggesting the labor market is weaker than the headline unemployment rate indicates. A continued rise in the U6 rate could increase pressure on the Fed to cut rates further, even if nonfarm payrolls remain positive.

Market participants will also closely watch the Federal Reserve's upcoming communication, including speeches from Fed officials like Michelle Bowman. These remarks may provide additional clues about the central bank's policy outlook.