Federal Reserve Rate Cut Remains in Question!

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The eagerly awaited December non-farm payroll report for the United States is set to be released tonight, with many analysts closely monitoring the average hourly earnings as a potential obstacle for any interest rate cuts by the Federal ReserveThis report, scheduled for release at 9:30 PM Beijing time on January 10, will provide insights into the health of the American labor market as it continues to adjust after the pandemic.

Economists predict that the report will illustrate a steady, though slightly slowing, growth in employmentThe consensus anticipates that the U.S. economy added approximately 160,000 new jobs in December, with average hourly earnings expected to rise by 0.3% month over month, marking a year-over-year increase of around 4.0%. Additionally, the unemployment rate is forecasted to remain steady at 4.2%. However, recent data from the ADP, considered the “little non-farm” report, indicated a slowdown in hiring and wage growth in the private sector, hinting at a decreasing demand for workers.

One of the most critical data points in this upcoming report will be the growth rate of average hourly earningsThis component has seen an upward trend in recent months, raising concerns over rising wages potentially increasing inflationary pressuresEconomists speculate that if wage growth continues to outpace expectations, it may compel the Federal Reserve to reassess its stance on interest rate cutsTraders' confidence in future rate reductions has waned, with predictions suggesting a minimal cut of only 25 basis points in the first half of the year; the outlook for further reductions rests at about 50/50, reflecting broader market hesitancies.

Within the perspective of the economy, Gus Faucher, chief economist of PNC Financial Services Group, aligns with market opinions in forecasting the addition of 160,000 jobsHe noted that such a figure aligns well with the persistent low unemployment rates and the Fed's mandate to maximize employment

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Faucher elaborates, "This number is quite respectable and echoes a healthy labor market." He further anticipates a slight uptick in job creation, particularly within the manufacturing sector as it recuperates from past strikesNonetheless, he acknowledges the challenges posed by high-interest rates and the ongoing pressure from shifts in demand for manufactured goods.

Moreover, the Fed officials will be keen on average hourly wage data, as rapid wage increases could exacerbate existing inflationary trendsAs reported, the year-over-year wage growth spiked from 3.6% in July to 4.0% in November, complicating the Fed’s ability to deliver timely monetary easingFaucher states, “An ongoing acceleration in wage levels can be concerning for the Fed, making it difficult for them to implement the policy adjustments they may desire.”

The dynamics of interest rate adjustments by the Federal Reserve have become a focal point of discussion among investors and analysts alikeLast December brought an unexpected revision when the Fed halved its expectations for rate cuts by 2025, leaving investors startledMany factors—including persistent inflation, uncertainties surrounding fiscal policy, and a robust labor market—are likely to temper the Fed's ability to ease its monetary stance substantially this year.

Recent reports from analysts at Bank of America highlight that a strong labor data readout could halt any further rate cuts from the Fed, especially if the unemployment rate hovers around 4.2%. While the base expectation suggests two additional rate cuts this year, they assert that “data needs to substantiate the rationale for more easing.” Current assessments by the CME FedWatch Tool indicate that investors are placing a roughly one-third chance on interest rates remaining stable within the 4.25%-4.50% range by June, while the probability of no change in January stands at a prominent 93.1%.

Looking ahead to 2025, forecasts regarding the U.S. employment market exhibit a degree of uncertainty, with some economists projecting a rebound while others anticipate a continued slowdown