Fed likely to hit pause on rate cuts after strong jobs report — asset managers

A stronger than expected December jobs report will likely compel the Federal Reserve to postpone any more rate cuts as the economy ended 2024 with a bang, asset managers said.

“The strength of today’s December jobs report puts to rest lingering chances of a 25 (basis point) cut in January and shifts the focus to the March meeting, where further rate cuts will depend on progress on inflation,” said Lindsay Rosner, head of multisector fixed-income investing at Goldman Sachs Asset Management, which has $3.1 trillion in assets under supervision.

Josh Jamner, investment strategy analyst at ClearBridge Investments, also said the strong jobs numbers indicates a January rate cut is “all but off the table.” ClearBridge has $193.3 billion in AUM.

Jack McIntyre, portfolio manager at Brandywine Global Investment Management, which has $63 billion in AUM, expects no rate cuts by the Fed for the first half of 2025. The central bank, he noted, is “becoming more cautious about executing future rate cuts. The longer the Fed is on pause the more likely the next move will be to start increasing policy rates.”

However, McIntyre observed that as important as the labor market is, the most critical variable for the Fed and markets is inflation.

“Next week’s inflation data will be more important,” he said.

The U.S. economy created 256,000 jobs in December, above November’s downwardly revised figure of 212,000 and well above economists’ expectations, the U.S. Bureau of Labor Statistics reported on Jan. 10.

The unemployment rate clocked in at 4.1%, just below the 4.2% figure from the prior month. Economists had expected an increase of 153,000 jobs in December and a jobless rate of 4.2%, according to a survey by FactSet Research Systems, a financial data firm.

The bureau also noted some revisions to payroll figures from the past two months — the October figure was revised up by 7,000 to 43,000, while the November data was revised down by 15,000 to 212,000. With these revisions, employment in October and November combined was 8,000 lower than previously reported.

In December, job gains were especially pronounced in the healthcare, government, social assistance and retail sectors, the bureau added in the release.

For the full calendar year, the U.S. economy added 2.2 million jobs, an average monthly gain of 186,000), but that fell well below the 3 million jobs created in 2023, an average monthly gain of 251,000).

Fed futures trading are predicting no rate cut at the next meeting on Jan. 29. As of the morning of Jan. 10, according to CME Group's FedWatch tool, market participants' pricing of fed fund futures indicated there is a 97.3% probability that the central bank will keep rates unchanged and only a 2.7% probability it will cut rates by 25 basis points.

The Fed’s key short-term interest rate is currently in a range of between 4.25% to 4.5%, after the central bank reduced rates by 25 basis points at the Dec. 18 meeting.

“The bond market has been more volatile than usual and looking for reasons to push yields higher,” said Bryce Doty, senior vice president and senior portfolio manager at Sit Investment Associates, which has $17 billion in assets under management.

“This (jobs) report is going to fuel a continuation of higher yields and pushes off the next Fed rate cut even further. We might not see another rate cut until next quarter,” he said.

Jordan Rizzuto, managing partner and CIO at GammaRoad Capital Partners, said the strong jobs report highlights the Fed’s policy dilemma entering 2025 and complicates the picture for forward guidance.

“Inflation has remained above the Fed’s stated target while the labor market’s overall strength has proven more persistent than the Fed likely anticipated,” he noted. “Further easing in this economic environment could potentially support a reacceleration of inflationary pressures, which in turn could threaten consumer confidence levels that have recently rebounded.”

GammaRoad is a research firm that develops systematic investment strategies with the goal of improving traditional portfolios.