Solid payroll gains seen cutting chances for March rate cut

Solid payroll gains seen cutting chances for March rate cut
Futures are now pricing about 135 basis points of Fed rate cuts this year, down from more than 150 basis points earlier in the week.
JAN 05, 2024

U.S. job growth picked up in December and wage gains exceeded expectations, diminishing prospects for an imminent Federal Reserve interest-rate cut.

Nonfarm payrolls increased 216,000 after downward revisions to the prior two months, a Bureau of Labor Statistics report showed Friday. The unemployment rate held at 3.7% as the workforce shrank. Average hourly earnings rose 0.4% from a month earlier.

MetricActualMedian estimate
Change in payrolls (MoM)+216k+175k
Unemployment rate3.7%3.8%
Average hourly earnings (MoM)+0.4%+0.3%

The advance in payrolls was led by health care, government, construction and leisure and hospitality. A measure of the breadth of job gains picked up.

The December figures cap a year where the labor market moderated from its breakneck post-pandemic recovery without sinking into a downturn that was widely forecast earlier in 2023. Despite Fed interest rates at a two-decade high, the resilient labor market has fueled steady consumer spending and healthy economic growth even as inflation has slowed.

After the jobs report, traders reduced bets on a Fed rate cut in March to about 50-50 odds, while Treasury yields rose and U.S. stock futures fell.

Futures are now pricing about 135 basis points of Fed rate cuts this year, down from more than 150 basis points earlier in the week.

The demand for workers and employers’ willingness to raise pay are likely to reinforce Fed policymakers’ resolve to keep rates elevated until they see further evidence that price increases are cooling throughout the economy. The report also bolsters prospects that they can achieve a soft landing.

“The overall picture is of a steady job market that is gradually cooling off,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “But the rise in average hourly earnings could keep the Fed on hold longer than the market is pricing in.”

Despite the healthy pickup in December job growth, the report included a host of caveats.

The participation rate — the share of the population that is working or looking for work — fell by 0.3 percentage point to 62.5%, the largest monthly drop in nearly three years. The decrease was concentrated among younger and older cohorts. For those ages 25-54, participation eased 0.1 point.

The report also showed it’s taking longer for unemployed Americans to find work and the number of full-time employees dropped by the most since April 2020. The data, meanwhile, indicated a drop in temporary-help employment to the lowest since May 2021.

Central bankers are paying close attention to how labor supply and demand dynamics are impacting wage gains. Friday’s report showed average hourly earnings increased 4.1% from December 2022. Earnings for nonsupervisory employees, who make up the majority of workers, rose 0.3% from November and 4.3% from a year earlier.

The jobs report is made up of two surveys — one of businesses and the other of households. The data incorporated annual revisions to the household survey data, which informs statistics like the unemployment rate and participation rate, but they didn’t change the overall employment picture.

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