Robust Labor Market Hinders Fed Rate Cut Prospects
The January jobs report signals a resilient labor market, with unemployment falling, wages rising, and job gains revised upward. These factors suggest the labor market remains strong, reducing the likelihood of an immediate interest rate cut by the Federal Reserve.
The unemployment rate dropped to 4%, its lowest since April 2024, while wages increased 0.5% month-over-month, exceeding expectations. Additionally, payroll revisions showed an increase of 100,000 jobs in December and November combined.
The Fed aims to bring inflation down to 2% while maintaining full employment. The recent labor data indicates that the labor market is not deteriorating rapidly, justifying the Fed's cautious approach on interest rate cuts.
Analysts and economists agree that the labor market's strength diminishes the chances of a rate cut in the short term. The CME FedWatch tool predicts a less than 50% probability of a rate reduction before June 2025, while markets assign a 52% probability to a single cut this year.
The Fed's recent Summary of Economic Projections forecast two rate cuts in 2025, but markets now anticipate fewer cuts due to the labor market's resilience. Fed officials have emphasized the need for "real progress on inflation" or "weakness in the labor market" before considering further rate cuts.
While the Job Openings and Labor Turnover Survey (JOLTS) and job openings rate show signs of cooling, these measures have stabilized recently, suggesting a stabilizing labor market rather than substantial weakness.
Economists expect the Fed to remain on the sidelines regarding rate cuts in 2025, with some predicting the need for softer jobs reports before considering a policy shift. However, Wells Fargo economists believe the potential for inflation upside risks could lead to fewer cuts than initially anticipated.