The U.S. economy added 223,000 jobs in December, far exceeding expectations of around 153,000 jobs. The strong job growth signals a healthy economy but raises questions about how soon the Federal Reserve will cut interest rates again. Traders now expect just a 2.7% chance the Fed will cut rates at its policy meeting later this month, according to the CME FedWatch Tool.
The Russell 2000 index, which tracks smaller companies, fell 2.2%, highlighting concerns about the impact of “higher for longer” interest rates. President-elect Donald Trump’s proposed tariff policies have spooked investors and surged bond yields. The yield on the 10-year US treasury spiked to 4.76%, and the yield on the 30-year US treasury rose to 4.95%.
Rising yields signal concern about a stronger-than-expected economy, resurgent inflation, and potentially fewer rate cuts in 2025 than anticipated. The strong jobs report sent yields higher amid expectations for the Fed to pause its rate-cutting cycle for a significant period,” Ross Mayfield, an investment strategist at Baird, wrote in a note Friday. Stocks dragging the market lower on Friday included Nvidia, which fell 3%, Apple, which fell 2.4%, and Palantir, which fell 1.4%.
Jobs data shifts Fed expectations
“The better-than-expected increase in jobs caused an immediate reaction in both stocks and bonds, with prices moving lower and bond yields moving higher, as yields move inversely with price,” wrote Chris Zaccarelli, chief investment officer at Northlight Asset Management, in a note Friday. Following the stronger-than-expected December employment data and concerns about resurgent inflation, Wall Street is adjusting its expectations for the Fed’s rate-cutting path this year.
Analysts at Goldman Sachs now expect just two rate cuts from the central bank — in June and December — as opposed to the previously anticipated three, citing job growth that exceeded expectations. At Bank of America, economists now believe the Fed is done cutting rates and see a growing possibility that central bankers may need to consider raising rates instead. “We think the cutting cycle is over,” Aditya Bhave, senior US economist at Bank of America, said in a report.
“Inflation is stuck above target, with upside risks … The conversation should move to hikes, which could be in play.”
However, Morgan Stanley analysts expect the Fed to cut rates in March, highlighting diverging forecasts on Wall Street. “The report should reduce the probability of near-term Fed cuts, though our more favorable outlook on inflation keeps us thinking a March cut is still more likely than not,” analysts said in a note. Baird’s Mayfield said a pause in Fed rate cuts until at least May now seems likely.
“The big question is to what extent is the Fed thinking about immigration and tariff policy that is yet to be implemented,” Mayfield said. Traders on Friday expect a 25% chance the Fed will cut rates in March, down from Thursday’s expectations of a 41% chance, according to the CME FedWatch Tool.
