A surprisingly strong December jobs report defies recession fears and will keep the Fed in a holding pattern for the foreseeable future. Mortgage rates will increase today.
256,000 jobs were created in December, many more than the 150,000 expected by forecasters. The unemployment rate unexpectedly ticked down to 4.1% from 4.2%. Notably, the change in the unemployment rate was the result of more people looking for work, and even more people finding jobs. Revisions to previous months of data, which has been largely negative recently, only saw 8,000 jobs subtracted this month. The Sahm Rule—a historically perfect predictor of recessions—was triggered following the July jobs report, but is now untriggered. The annual pace of job growth in 2024, about 186,000 per month, is very similar to the 2016 to 2018 period, where the economy saw solid economic growth. All in all, today’s data show that the labor market is very robust with little recession risk.
Today’s data makes an even stronger case for the Fed to push back any further rate cuts until well into 2025. With one 50 bps cut in September 2024 followed by two consecutive 25 bps cuts in November and December, the Fed has now brought the fed funds rate down from 5.5% to 4.5%. Given uncertainty around the neutral rate—the rate that neither stimulates nor contracts the economy—the Fed signaled in its December meeting that they expect to dramatically slow the pace of future rate cuts. They also pointed to strong economic data and potential policy changes from the incoming administration that threaten to accelerate inflation. The jobs report today confirms the Fed’s case. Futures markets now only have one rate cut priced in for 2025 for sometime midyear.
Mortgage rates will rise today and remain high until there is economic data or policy announcements from President Trump that would give markets a reason to expect more cuts from the Fed. We will get a new inflation report next Wednesday, but there may be little reason to expect weaker economic data in the coming months, because the first quarter of the year is when economic data has been unusually strong since the pandemic. This is partly because the statistical adjustments made to account for normal seasonal variation do not appear to be working as well post-pandemic. However, the upcoming presidential inauguration may bring a slew of policy announcements that could trigger significant mortgage rate volatility.