The labor market is an important factor in the Fed’s monetary policy. (Photo: Freepik, EyeEm)
Washington – Trump’s departure – or chaos: The change of power in the USA stirs up uncertainty and moods can change. The markets often react sensitively to labor market data. Today the US government releases December employment growth (2:30 p.m. CET).
In the previous month, the US job engine was surprisingly dynamic, with 223,000 new jobs outside of agriculture. However, observers also saw this as a counter-effect to October, when the increase was very small due to strikes and the aftermath of the hurricane.
FactSet Estimate for December – ADP report below forecast
153,000 new jobs are said to have been added in December – according to the average forecast by economists according to FactSet. That would be a moderate result that neither increases economic concerns nor increases fears of inflation. The unemployment rate should therefore remain at 4.2 percent.
The forecast was below on Wednesday ADP employment report. The payroll service provider ADP, which analyzes data from around 400,000 corporate customers every month, reported only 122,000 new jobs in the private sector. Economists had expected 139,000 additional jobs in December.
ADP wage growth slightly down – vacancies in November
The US labor market slowed its pace of growth last month, commented ADP chief economist Nela Richardson. In addition to new hires, wage growth has also declined. It is now 4.6 percent year-on-year for long-term employees.
However: fell higher than expected the number of vacancies as of November 30th. 8.1 million vacancies after 7.8 million at the end of October – that means more dynamism in the labor market and greater demand for personnel. Service providers in particular are increasingly looking for new employees.
Fed labor market forecast – fewer interest rate cuts in 2025
The US Federal Reserve continues to expect a solid labor market – this is what it says in the report published on Wednesday Minutes of the last interest meeting of the year 2024. In December, the monetary authorities cut the key interest rate for the third time since September to 425 to 450 basis points.
At the same time, Fed decision-makers indicated that now or very soon it would be time to “slow down the pace of monetary easing.” This means: fewer interest rate cuts in 2025. The US Federal Reserve’s projection assumes only two interest rate increases of 0.25 percent each for 2025.
US inflation remains sluggish – wage increases could drive up prices
The main reason for the reluctance is the dynamic price increase – in November US inflation climbed to 2.7 percent compared to the same month last year. The core rate excluding energy and food has remained at 3.3 percent for three months, well above the official 2 percent target.
One driver of inflation is wage growth. The Fed will focus on the rise in salaries, says Gus Fauchereconomist at PNC Financial Services Group. Wage growth increased from 3.6 to 4 percent in the second half of 2024 – 3.5 percent should be the inflation target, according to Faucher.
Labor market outlook for 2025 – interest rate forecast: FedWatch Tool
As far as job growth is concerned, economists at US bank Wells Fargo expect an average of around 125,000 new jobs per month in 2025, according to morningstar.de. The “slow but steady decline” will continue and the unemployment rate will be around 4.3 percent this year.
Will the Fed pause interest rates at 4.25 to 4.5 percent when it makes its next decision on January 29th? The market’s vote is clear, at least based on today’s labor market figures: This FedWatch Tool The CME futures exchange estimates the chance of this at 95.2 percent. (As of January 9th, 5:10 p.m. CET)