Strong job growth in the US raises doubts about further interest rate cuts by the Fed Reuters

Ann Saphir and Howard Schneider

(Reuters) – The U.S. jobs market again defied an expected slowdown, with companies adding more than a quarter of a million jobs in the final month of 2024 and leaving Federal Reserve policymakers mulling the need for more interest rate cuts in a strong economy.

The increase of 256,000 jobs in December was well above the 160,000 expected by economists in a Reuters poll. The unemployment rate, as reported in the Labor Department’s monthly jobs report, fell to 4.1% from 4.2%.

In another note on the Fed’s confidence in further rate cuts and a further slowdown in inflation, consumers now expect prices to rise 3.3% over the next year, a sharp jump from previous months, a separate sentiment survey by the University of Michigan.

Stronger-than-expected inflation and uncertainty about the effects of President-elect Donald Trump’s new economic policies when he takes office on Jan. 20 have already put U.S. central banks on a path to slower rate cuts this year. Last month, many began to see faster growth and higher inflation to account for Trump’s plans for broader tariffs, tax cuts and immigration restrictions.

The renewed strength in the labor market presents a new dilemma, adding to arguments that inflationary pressures may not be fully extinguished and creating a potential clash with Trump, who has already said he thinks interest rates are too high and the economy needs more support.

It could also call into question Fed Chairman Jerome Powell’s view that the labor market is no longer a source of inflationary pressure.

The data “will raise concerns at a jittery Fed that the labor market could re-accelerate after the election in ways that could lead to another tightening of labor market conditions,” Krishna Guha, vice president of Evercore ISI, wrote in a note.

If data in the new year continue to show a strengthening labor market, Guha said, that could keep the Fed on hold until at least June, if not later.

That’s a forecast in line with financial market expectations, which had priced in a single rate cut before June, marking the end of the Fed’s rate-cutting cycle. Stocks fell and government bond yields rose after the data.

Speaking on CNBC shortly after the release of the jobs report, Chicago Fed President Austan Goolsbee said he still felt cool inflation called for further rate cuts, with the benchmark rate likely to be “quite a bit lower” in 12 to 18 months if immediate expectations are met.

“Is there evidence of the economy overheating? So far, in recent months, there’s not a lot of evidence,” Goolsbee said, noting that inflation over the past six months was 1.9 percent, while wage growth was in line with the Fed’s inflation target of 2 %. “I am pleased that the labor market is stabilizing at something like a full employment rate.”

DATA ON INFLATION

Last September, the Fed began cutting rates in half-a-percentage-point increments more than usual to protect the labor market from a slowdown that officials feared was taking shape.

By December, when the central bank cut its benchmark overnight interest rate to its current range of 4.25%-4.50%, those fears had largely faded, and some policymakers signaled a potential turnaround in the labor market.

“With business optimism so high and labor supply unlikely to continue to grow so strongly, the current balance in the labor market appears likely to tip toward hiring rather than firing,” Richmond Fed President Thomas Barkin said in recent comments, citing a survey of CFOs that his regional Fed bank helps set up that showed a post-election jump in prospects.

A group of other US central bank policymakers in recent days, including Fed Governor Michelle Bowman and Fed President St. Louisa Albert Musalema, also said they believe the Fed’s interest rate-cutting days are nearing the end, if not over.

Key to the discussion will be upcoming inflation data, which some officials say is almost set to slow.

The only reason recent inflation announcements have shown so little progress, Goolsbee said, is because inflation spikes in early 2024.