No Fed rate cut at the end of the month? The "new Fed news agency" says December nonfarm payrolls pave the way for holding steady; traders see almost no chance for January.

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December Non-Farm Payrolls Report seems to have dashed market expectations for a Fed rate cut at the end of this month. Although only 50,000 jobs were added in December and the previous two months saw substantial downward revisions, the unemployment rate unexpectedly fell to 4.4% in December, providing ample reason for the FOMC to hold steady at its meeting.

After the non-farm payrolls report was released, Nick Timiraos, chief economic correspondent for the Wall Street Journal, known as the "New Fed Whisperer," commented that the report cleared the way for Fed officials to remain on hold at the January meeting.

The unemployment rate fell from a preliminary reading of 4.6% in November to 4.4% in December, temporarily alleviating the worst fears about deteriorating labor market conditions. It was these concerns that drove the Fed to cut rates at the past three meetings, despite facing increasing opposition each time from a minority of officials who saw no need to ease.

US Treasury traders reacted quickly to the jobs report, almost completely unwinding bets on a January rate cut after the release.

After the report, US government bond prices fell across the board, with yields rising by as much as 3 basis points at various maturities. The interest rate swaps market reflected a zero probability of a January rate cut, and traders now expect the Fed's first cut in June, a month after Chairman Powell's term ends. The total rate cut for the year remains about 50 basis points—two regular-sized cuts.

This data highlights the labor market's contradictory state: persistently weak hiring alongside a falling unemployment rate, further complicating the Fed's decision path.

Job Growth Hits Post-Pandemic Low, Three-Month Average Turns Negative

The non-farm payrolls report showed the US added only 50,000 non-farm jobs in December, below Wall Street's 65,000 estimate. More notable, job gains for the previous two months were revised down by a total of 76,000: October's decrease was revised from 105,000 to 173,000, and November's gain was revised from 64,000 to 56,000.

Nick Timiraos pointed out that the private sector's average monthly hiring over the last three months fell to 29,000, the second lowest this year. For all of 2025, non-farm payrolls rose by only 584,000—the weakest annual performance since the pandemic cut 9.2 million jobs in 2020. The private sector added an average of 61,000 jobs per month, the lowest non-recessionary gain since the "jobless recovery" in 2003.

By industry, healthcare added 21,000 jobs, leisure and hospitality also contributed to growth, but retail, construction, and manufacturing all saw job losses. Five out of eleven major industries saw a decline in employment.

Nevertheless, wage growth remains resilient. Average hourly earnings rose 0.3% month-on-month in December, with the prior number revised up to 0.2%; over the past 12 months, wages grew 3.8%, about one percentage point higher than the inflation rate.

Timiraos said,

The December non-farm payrolls report solidifies market expectations that the Fed will leave rates unchanged at its January 27-28 meeting; however, the weak jobs data shows that debates about labor market health are far from over.

Timiraos noted that two voting FOMC members for 2026 hinted earlier this month that there was no need for imminent action.

Philadelphia Fed President Anna Paulson said that if inflation cools, further rate cuts may be appropriate later this year, but she also hinted she is not in a hurry to move.

Minneapolis Fed President Kashkari said he believes the Fed has reduced rates close to a hard-to-pinpoint "neutral" level, one that neither stimulates nor restrains economic activity.

Unemployment Decline Shuts Rate Cut Window

The unexpected drop in unemployment rate was the headline of this non-farm payrolls report and the key reason for the Fed to hold steady. The unemployment rate fell from 4.5% in November to 4.4% in December, below expectations of 4.5%. It's worth noting November's initial rate was rounded to 4.6%; this report slightly revised it down.

Nick Timiraos analyzed that this drop temporarily eased the worst fears regarding labor market deterioration. Although weak hiring further proves that debates on labor market health are far from over, the jobs report solidifies expectations for the Fed to be on hold in January.

The December unemployment rate decline partially resulted from a fall in the labor force participation rate to 62.4%. That means some unemployed left the labor force and are no longer counted as "actively seeking work." Unemployment rates for teens, African Americans, and those without a high school diploma all declined.

PGIM Fixed Income Chief Investment Strategist Robert Tipp said:

"This (report) keeps the Fed on track for continued gradual rate cuts this year. They are at the very top of the neutral (rate) range, or the high end. So they may feel the current level has little impact on the economy and may consider skipping a meeting (before cutting rates)."

Traders Push Rate Cut Bets to Midyear

After the data, the Treasury market quickly repriced. On Friday, the two-year Treasury yield, sensitive to rates, rose 3 basis points to 3.52%, and the benchmark 10-year yield climbed to 4.17%. Traders maintain expectations for about 50 basis points of cuts for all of 2026, but the timing of the first cut is pushed to June, with another likely in the fourth quarter.

Subadra Rajappa, Societe Generale’s US rates strategy chief, said: "Declining unemployment and rising wages support the Fed holding steady in January."

John Briggs, Natixis US rates strategy chief, pointed out: "We think the Fed will focus more on the unemployment rate than the noise in the overall (hiring) data, so in my view this is slightly bearish for US rates."

Bloomberg economist Anna Wong said December’s non-farm payrolls showed weak hiring, and downward data revisions in recent months reflect weaker momentum than expected. Exceptionally cold December weather may have had some impact on hiring. Possibly more useful signals come from the household survey showing robust hiring and the unemployment rate down to 4.4%. Friday’s jobs report may have mildly surprised the Fed but was not enough to persuade the FOMC to cut further.

Wong expects next Tuesday’s January 13 CPI to be strong, further supporting the view that the Fed won’t cut rates soon. She also thinks data after March will support the forecast of 100 basis points in cuts this year.

Before the data release, major Wall Street banks including Citigroup, JPMorgan, and Morgan Stanley maintained forecasts for a January rate cut. But after the release, those expectations are now completely dashed. Fed officials' next focus will shift to inflation data and subsequent labor market performance to determine this year’s pace and scale of cuts.

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