The US labor market isn’t showing signs of weakness that would prompt another interest rate cut from the Federal Reserve in the near term.
The January jobs report released on Friday showed continued signs of resilience in the labor market as the unemployment rate unexpectedly fell, wages grew more than expected, and December’s monthly job gains were revised higher to show the US labor market exited 2024 on an even better footing than previously reported.
The unemployment rate fell to 4%, its lowest level in eight months, while wages increased 0.5% month-over-month, higher than the 0.3% seen in the prior month. Payroll revisions also showed that the US economy added 100,000 more jobs than initially thought in December and November combined.
The Fed has kept interest rates high to try to bring inflation down to its 2% target. The second part of its mandate, though, is full employment. The central bank must make sure rates aren’t too restrictive in a job market that is rapidly deteriorating. So far that doesn’t appear to be the case.
“The broader picture is still one of labor market resilience and sustained wage pressures,” Seema Shah, Principal Asset Management chief global strategist, wrote in a note to clients on Friday. “This simply gives the Fed little reason to cut policy rates immediately.”
The Federal Reserve’s most recent Summary of Economic Projections (SEP) from December projected two interest rate cuts in 2025. But markets are already shifting to see fewer cuts as the more likely case this year. Investors are pricing in less than a 50% chance of a rate cut before the Fed’s June meeting, per the CME FedWatch tool. Markets see a 52% chance the Fed cuts just once in 2025.
The Fed held interest rates steady at its January meeting as Chair Powell described the labor market as “broadly stable.” Powell added that the central bank would be focusing on “real progress on inflation or alternatively, some weakness in the labor market” when considering cutting interest rates further.
On Friday, Chicago Fed President Austan Goolsbee told Yahoo Finance the latest labor data shows “we’re settling into something like full employment.” Goolsbee noted this is a better place for the labor market than in the summer when a steady rise in the unemployment rate had sparked concern over how rapidly the labor market was cooling.
Capital Economics deputy chief North America economist Stephen Brown wrote in a note on Friday morning that the strength in payroll revisions and decline in the unemployment rate likely keeps the Fed “on the sidelines” from cutting interest rates in 2025.
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