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- After a Friday jobs report showed that hiring for December exceeded expectations, the odds of a Federal Reserve rate cut this year dropped.
- A strong job market means that the Fed is less likely to be under pressure to reduce interest rates and to stop layoffs in an effort to revive the economy.
- The central bank keeping the fed funds rate high will drag on the economy and pressure borrowers' budgets on all kinds of loans, from credit cards to mortgages.
- The Fed's reluctance to cut rates is unlikely to please incoming president Donald Trump, who has said interest rates are too high.
Waiting for the borrowing cost to decrease for car loans, mortgages or credit cards has just gotten longer.
Data released on Friday morning showed that the economy created more jobs in December than was expected. This will likely make Federal Reserve officials feel comfortable keeping the benchmark rate of the central bank higher than what they expected just a couple months ago.
In fact, just a few short months ago economists discussed how quickly the Fed could cut interest rates by 2025. The question is whether the Fed will cut rates at all. The fed funds rate affects interest rates on loans of all kinds, so this is not good news for consumers, at least in the short term.
“The robust December employment report is another piece of economic data that suggests the Federal Reserve will move to the sidelines for a while; we foresee them keeping rates steady throughout the first half of the year,” Kathy Bostjancic is the chief economist of Nationwide. She wrote a comment.
The CME Group’s FedWatch Tool shows that as of Friday afternoon financial markets have priced in a 30 percent chance for 2025 to pass by without more rate cuts. That is more than double what the odds were the day before the job report. The tool uses fed funds trading data to forecast rate changes.
Why More Jobs = Higher Interest Rates
Federal Reserve’s monetary policy and its ability to control inflation is the reason why good economic news can be bad for rates. Congress gave the Fed two missions: to keep unemployment high and inflation low.
The Fed kept the fed funds near zero to help keep the economy flowing and employers on payroll. In March 2022 after the inflation started to rise, the Fed raised interest rates in an attempt to cool inflation by slowing down spending, borrowing, and allowing supply and demand to balance.
Inflation was clearly on a downward trend toward the Fed’s target of a 2 percent annual rate and the economy was slowing. At its three subsequent meetings, the Fed reduced its benchmark interest rate by an entire percentage to its range between 4.25% and 4.5%. The Fed still considers it to be within the acceptable range. “restrictive,” Or, it can drag down the economy.
In recent months, however, inflation has remained stubborn while the job market has remained resilient. It means the Fed is under less pressure to reduce rates to stop mass unemployment and that policymakers are more pressured to raise rates to fight inflation.
Minutes of the Fed meeting in December revealed that Fed officials had acknowledged this shift and were less willing to reduce interest rates further.
Austan Goolsbee of Federal Reserve Bank of Chicago told MSNBC on Friday that the Fed would need to see good inflation figures in order to lower rates.
“If conditions are stable and we don’t have an uptick in the inflation rate and we keep having them come in around 2% with stable and full employment, I think that the rates should go down,” Goolsbee stated.
Fed’s hesitant approach in reducing interest rates could place the central bank, which operates independently of the rest government, on a collision path with the Trump administration. President-elect Trump has stated that low rates are what he would prefer from the Fed. He said this earlier in the week. “interest rates are far too high.” During his first term, Trump and Fed chair Jerome Powell often clashed over interest rates.
UPDATE & CORRECTION: This article has been updated to include the latest likelihood of a rate cut being priced in by traders and to clarify that the jobs report was released on Friday.
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