In December, the U.S. economy saw an increase of 223,000 jobs, significantly surpassing the forecast of approximately 153,000 jobs. This robust job creation points to a thriving economy but raises doubts regarding the timing of the next interest rate cuts by the Federal Reserve. According to the CME FedWatch Tool, traders now assess a mere 2.7% likelihood that the Fed will opt to cut rates during its upcoming policy meeting.
The Russell 2000 index, which monitors smaller businesses, dropped by 2.2%, reflecting worries about the repercussions of prolonged “higher for longer” interest rates. Proposed tariff strategies from President-elect Donald Trump have alarmed investors and pushed bond yields up. The yield on the 10-year U.S. Treasury soared to 4.76%, while the yield on the 30-year U.S. Treasury climbed to 4.95%.
Increasing yields indicate anxiety regarding a stronger-than-anticipated economic landscape, a resurgence in inflation, and the possibility of fewer rate cuts in 2025 than previously estimated. Following the positive jobs report, yields rose amidst sentiment that the Fed may hold off on reducing rates for an extended duration, as noted by investment strategist Ross Mayfield from Baird in a communication on Friday. Notable stocks that contributed to the market decline on Friday included Nvidia, which saw a 3% decrease, Apple, down by 2.4%, and Palantir, which fell by 1.4%.
Job Data Alters Fed Outlook
According to Chris Zaccarelli, chief investment officer at Northlight Asset Management, the unexpectedly strong job increase triggered an immediate market response, leading to lower stock prices and higher bond yields, since yields have an inverse relation to price. Following the stronger-than-anticipated employment figures for December and rising concerns over inflation, Wall Street is recalibrating its forecasts concerning the Fed’s rate-cutting strategy for the year.
Analysts from Goldman Sachs now project only two rate reductions from the Federal Reserve, set for June and December, rather than the previously expected three, attributing this to job growth that outstripped forecasts. Economists at Bank of America now contend that the Fed may halt rate cuts and face increasing odds of needing to raise rates instead. As stated in a report by senior economist Aditya Bhave at Bank of America, “We believe the cutting cycle has reached its end.”
“Inflation remains persistently above target, with upward risks… The dialogue should pivot to potential hikes, which are on the table.”
Conversely, analysts at Morgan Stanley continue to anticipate a rate cut in March, underscoring differing viewpoints among Wall Street experts. “The report is likely to diminish the chances of imminent Fed rate cuts, yet our more optimistic outlook regarding inflation leads us to believe that a March reduction remains more probable than not,” reported analysts in a memorandum. Baird’s Mayfield suggested that a pause in Fed rate cuts until at least May now appears plausible.
“The critical question is how much the Fed is considering policies on immigration and tariffs that have yet to be enacted,” Mayfield commented. On Friday, traders placed a 25% probability on the Fed cutting rates in March, down from 41% on Thursday, as indicated by the CME FedWatch Tool.
