Jobs Data Sparks Fed Rate Hike Fears: Market Takeaways

The U.S. jobs report for December 2024 has sparked fears of a potential Fed rate hike, as the economy added far more jobs than expected. The robust employment growth, coupled with a fall in the unemployment rate, has led market participants to reassess their expectations for the Federal Reserve's monetary policy.



The strong jobs data has led to a significant shift in market expectations for the Fed's benchmark interest rate. As of Friday afternoon, financial markets were pricing in a 26% chance that 2025 will come and go without any more rate cuts, double the 13% chance the day before the jobs report, according to the CME Group's FedWatch tool. This suggests that investors are now less confident in the likelihood of further rate cuts this year.

The robust December employment report has also led officials at the Federal Reserve to become more comfortable holding the central bank's benchmark interest rate higher for longer than they had expected just a few months ago. Indeed, a few months ago, economists were discussing how fast the Fed might slash interest rates in 2025. Now they're questioning whether there will be any rate cuts at all.

The reason good news for the economy is bad news for interest rates comes down to the Federal Reserve's dual mandate: keep inflation low and employment high. The Fed held the fed funds rate near zero during the pandemic to keep easy money flowing through the economy and help employers keep people on the payroll. However, in March 2022, after inflation began to surge, the Fed did the opposite: it began raising interest rates, hoping to slow down borrowing and spending and allow supply and demand to rebalance, cooling inflation.

The Fed held its interest rate at a two-decade high until this September, when inflation was on what looked like a clear downward trajectory toward the Fed's goal of a 2% annual rate, and the job market was slowing down. The Fed cut its benchmark rate at its next three meetings, lowering it by an entire percentage point to its current range of 4.25% to 4.5%. It is still in the range that the Fed considers "restrictive," or dragging on the economy.

In recent months, however, inflation has remained stubborn while the job market has remained resilient. That means there's been less pressure on the Fed to cut rates to prevent mass layoffs and more pressure on policymakers to keep rates higher to fight inflation. Fed officials have acknowledged the shift, and have become more reluctant to cut interest rates any further, minutes released from the Fed's deliberations at its December meeting showed.

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said on MSNBC Friday that good inflation data will be needed for the Fed to cut rates this year. "If conditions are stable and we don't have an uptick in the inflation rate and we keep having them come in around 2% with stable and full employment, I think that the rates should go down," Goolsbee said.

The Fed's unhurried approach to rate cuts could put the central bank (which operates independently from the rest of the government) on a collision course with the incoming Trump administration. The president-elect has long said he prefers low interest rates from the Fed and said earlier this week that "interest rates are far too high." Trump often clashed with Fed Chair Jerome Powell over rates during his first term in office.

If you've been waiting for borrowing costs to fall for credit cards, car loans, or mortgages, your wait just got longer. The economy added far more jobs than expected last month, and that's likely to make officials at the Federal Reserve comfortable holding the central bank's benchmark interest rate higher for longer than they had expected just a few months ago. The Fed's reluctance to cut rates is unlikely to please incoming president Donald Trump, who has said interest rates are too high.