One number in the jobs report just crushed rate cut bets

Surging layoffs and rising unemployment prompted the Federal Reserve to move off the sidelines in September, resulting in a quarter-percentage point cut at three consecutive FOMC meetings to conclude 2025.

Those cuts may be it for a while, given the Bureau of Labor Statistics‘ December unemployment data released on January 9.

The BLS reported that the U.S. unemployment rate retreated to 4.4% last month from a downwardly revised 4.5% in November. Previously, the BLS had said that unemployment had reached 4.6% in November.

The better-than-expected labor market report led to a significant shift in the likelihood of a Fed rate cut at the next meeting on January 28. The CME’s FedWatch tool, which calculates rate cut probabilities based on the Futures market, shows odds of a cut were cut in half to 5% after the BLS release, essentially kissing chances of a drop in the Fed Funds Rate later this month goodbye.

Fed may not be ‘behind the curve’ after all

A dual mandate dictates the Federal Reserve’s monetary policy:

• Low inflation.
• Low unemployment.

That mandate was particularly challenging in 2025, given that inflation and unemployment often compete with each other. Raise rates and inflation falls, but unemployment grows. Lower rates and unemployment fall, but inflation grows.

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That dynamic kept the Fed on the sidelines for most of 2025 as Fed Chairman Jerome Powell argued lower rates would fan inflationary fires even as tariff costs are passed on to consumers.

The Fed finally acquiesced to concerns that it could fall behind the curve if it didn’t act to lower rates, sparking economic activity and reducing job losses.

Why the Fed cut rates in 2025:

• Layoffs totaled 1,206,374 in 2025, up 58%, according to Challenger, Gray & Christmas.
• Unemployment rose to 4.4% in December from 4% in January and 3.4% in 2023, according to the BLS.
• CPI inflation retreated to 2.7% in November from 3% in September, according to the BLS.

The combination of inflation slowing and the jobs market worsening made the unemployment side of the dual mandate too worrisome to ignore.

However, the decline in the unemployment rate in December may mean the Fed isn’t as far behind the curve as some had worried.

Jobs market: wobbly, but better than feared

Make no mistake, I see obvious trouble spots in the labor market. Layoffs and a decline in job openings are worrisome and suggest, at the very least, that hiring appetite has diminished. With nearly thirty years of professionally tracking markets and the economy under my belt, the direction last year certainly wasn’t overly encouraging to me.

The dip in the unemployment rate stems from a lower labor force participation rate rather than robust hiring. The Job Openings and Labor Turnover Survey (JOLTS) reveals 7.1 million open positions in November, down 885,000 over the past year and well below the 12 million peak notched in 2022.

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The 1.2 million layoffs reported last year by Challenger, Gray & Christmas rank among the worst years since 2000.

Worst years for layoffs since 1986:

• 2020: 2,304,755
• 2001: 1,956,876
• 2002: 1,466,823
• 2009: 1,288,030
• 2003: 1,236,426
• 2008: 1,223,993
• 2025: 1,206,374
  Source: Challenger, Gray & Christmas

The pace of job growth is also concerning to me.

The BLS revised the number of jobs created by the U.S. economy downward for October and November, stating that the economy created 76,000 fewer jobs than initially reported. In December, 50,000 jobs were created, lowering the average of jobs added to 61,000 per month in 2025 – the lowest in 20 years, excluding recessions, according to the Wall Street Journal’s Nick Timiraos in a post on X, formerly Twitter.

“The October NFP print was revised lower from -105,000 to -173,000, while the November NFP print was revised lower as well, from 64,000 to 56,000,” wrote analyst Stephen Guilfoyle on TheStreet Pro. “Looking solely at the December data, government hiring accounted for 13,000 of those jobs. Hence, the U.S. economy organically created just 37,000 private sector jobs.

Still, the revised unemployment rate was 4.5% in November, down from 4.6% initially, and the dip in December to 4.4% was better than expected, especially when using the unrounded figure.

According to Timiraos, the unrounded unemployment rate fell to 4.375% in December from a revised 4.536% in November. The unrounded rate was 4.44% in September. Wall Street analysts had expected the unemployment rate to be 4.7% last week, but revised their estimates to 4.5% earlier this week.

Given that backdrop, while weak job growth and layoffs are concerning, the lower unemployment rate reduces the Fed’s worry, causing the odds for a rate cut to crater sharply after the release.

Unemployment rate by month (2025):

• December: 4.4%
• November: 4.5% (revised from 4.6%)
• October: N/A (shutdown)
• September: 4.4%
• August: 4.3%
• July: 4.3%
• June: 4.1%
• May: 4.3%
• April: 4.2%
• March: 4.2%
• February: 4.2%
• January: 4%
  Source: BLS.

“It is likely that the worst is behind us in the labor market,” said Bank of America in a research note shared with me earlier this week.

What’s next for Fed interest rates?

Federal Reserve Chairman Jerome Powell cut at each of its final three meetings last year, reducing the Fed Funds Rate by three-quarters of a percentage point to a range of 3.5% to 3.75%.

With odds of another cut in January heading toward zero, whether rates fall from here will depend on how the labor market evolves in the coming months and what happens next to inflation.

The BLS will report December Consumer Price Index (CPI) inflation on January 13 (Tuesday). Wall Street economists’ consensus estimate is that inflation was 2.6% last month, slightly below the 2.7% reported for November.

Lower inflation provides cover for the Fed to reduce rates if unemployment starts climbing again, but given the drop in unemployment last month, January is likely to remain off the table.

The CME FedWatch tool currently projects two more cuts in 2026, but the Fed’s closely watched dot-plot, which measures the rate path predictions of Fed officials, suggests just one more cut this year.

“For now, our base case remains that the Fed will not cut again under Powell,” wrote Bank of America earlier this week.

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