The January jobs report revealed a drop in the unemployment rate to 4%, accompanied by monthly net nonfarm payroll gains of 143,000. Despite a slowing in the monthly pace of payroll gains from 307,000 in December, the U.S. labor market is solid. Before the jobs report was released, the odds were already low for an interest rate cut in the next Federal Reserve decision on March 19, and the January jobs report further lowered rate cut expectations. The potential for a deceleration in year-on-year consumer inflation rates still leaves the door open for the next Fed rate cut in May or June 2025.
January Jobs Report Shows Payroll Slowdown
The Employment Situation report, known to economists and analysts as the jobs report, was solid for January 2025. It reaffirmed that the labor market is on solid footing and that recession is not an imminent risk. It also reduced the chances of a March interest rate cut by the Fed.
On the upside, the unemployment rate fell modestly to 4% from 4.1%, although January payrolls reflected a slower net increase of 143,000 jobs. Total U.S. payrolls are now at a record high of 159.1 million jobs.
Annual historical revisions made the monthly payroll changes somewhat of a mixed bag. There were solid net upward revisions of 100,000 jobs to the previous two payroll figures. However, payrolls for all of 2024 were actually revised lower by 610,000.
Other data in the jobs report was also strong, including a rise in the Household Survey employed series, which rose by a whopping 2,234,000 jobs as the unemployed series fell by 37,000.
While the January jobs report supports the claim that the U.S. labor market is relatively solid, other recent data also reinforce this notion. After all, initial and continuing jobless claims are very low. Continuing claims are at 1.886 million, which is only around 1.1% of the labor force. Initial jobless claims are also very low, at just 219,000.
Strong Job Openings and Labor Turnover Survey data showed that there were 7.6 million open jobs in December 2024. While that figure is roughly 4.6 million fewer open jobs than the historic high in March 2022 of 12.2 million, 7.6 million open jobs would have been a record high before the Covid-19 pandemic. With a difference of around 5.7 million open jobs versus people collecting unemployment, it is difficult to expect very large net payroll losses across multiple months anytime soon.
According to Prestige Economics — ranked the most accurate U.S. unemployment rate forecaster in the world for a second consecutive quarter, according to Bloomberg’s latest rankings — the U.S. unemployment rate is likely to rise modestly on trend in 2025 while remaining relatively low.
Anticipating January Consumer Inflation After The Jobs Report
The Fed has a dual mandate to support full employment and keep inflation rates low and stable. The January jobs report, December JOLTS data, and recent weekly jobless claims reflect full employment in the U.S. labor market. However, consumer prices are not yet low and stable. Nor are consumer inflation rates yet at the Fed’s 2% inflation target.
Year-on-year consumer inflation rates accelerated in Q4 2024 for the Consumer Price Index and Personal Consumption Expenditures inflation.
December year-on-year consumer inflation rates were elevated and above the Fed’s 2% target, with total CPI at 2.9%, core CPI at 3.2%, total PCE inflation at 2.6%, and core PCE at 2.8%.
Year-on-year total CPI and PCE consumer inflation rates are likely to fall to the Fed’s 2% target in 2025, but they are currently above target—and core inflation rates could remain above the Fed’s 2% for most or even all of 2025.
Due to the currently elevated inflation rates, no change in Fed policy is likely on March 19. However, Prestige Economics expects the next 0.25% interest rate cut could come in May or June 2025 due to a likely slowing in U.S. year-on-year total CPI and total PCE consumer inflation rates in Q2 2025.
Fed Implications Of The January Jobs Report
Interest rate cuts are likely in 2025 and 2026, and the latest December 2024 Federal Open Market Committee projections reflect expectations of two 0.25% rate cuts in 2025. However, inflation is the Fed’s top concern, which is why the Fed left interest rates unchanged at its most recent meeting on January 29.
A solid labor market gives the Fed the license to leave interest rates unchanged, which is why the January jobs report provides further support for the Fed to maintain the current interest rate policy at its next meeting on March 19. This dynamic played out after the jobs report in the CME FedWatch Tool, which reflects Fed rate cut probabilities.
Prior to the release of the January jobs report, the CME FedWatch Tool put the odds of a 0.25% Fed rate cut on March 19 at 14.5%. After the jobs report was released, the odds of a 0.25% Fed rate cut on March 19 fell to 10.5%.
A 10.5% probability is very low, indicating that a Fed rate cut in March is highly unlikely. The odds of a rate cut on May 7 were at a higher probability of 29.7% following the release of the jobs report.
Market Implications Of The January Jobs Report And The Forthcoming January CPI Inflation Report
The January jobs report is disappointing for those anticipating more interest rate relief because the unemployment rate fell and labor market data are solid, despite a deceleration in monthly nonfarm payroll gains.
Markets are likely to interpret this month’s jobs report as a sign that the labor market is solid and recession risks are low, especially following the solid Q4 2024 GDP Report. While the labor market has slowed over the past three years, the January jobs report does not support a change in Fed interest rate policy on March 19. Lower chances of Fed interest rate cuts are likely to support bond yields and the dollar while weighing on bond prices, equities, and some industrial commodity prices.
Inflation seems likely to be the lynchpin that will determine whether the Fed will have the license to cut rates in future policy decisions this year. Looking ahead to the January U.S. CPI inflation report on February 12, Prestige Economics expects modest year-on-year decelerations in total CPI and core CPI due to base effects. However, this is not likely to be a one-off slowing.
Prestige Economics also expects year-on-year total CPI and total PCE to decelerate in Q2 2025 due to base effects, potentially falling below the Fed’s 2% target in 2025. However, core CPI and core PCE measures of inflation are likely to remain elevated and above the Fed’s 2% target through most, if not all, of 2025.
If year-on-year total CPI and total PCE inflation rates ease in Q2 2025 due to base effects, the dollar and bond yields could fall in Q2 while supporting equities, bond prices, and industrial commodity prices.
What do you think about the January jobs report and the outlook for consumer inflation?
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