Data on Friday showed US employment growth slowed more than expected in December. However, a fall in unemployment to 4.4% and solid wage growth suggested the labor market was not deteriorating quickly, boosting expectations that the central bank will leave borrowing costs unchanged at its January meeting.“If the labor market weakens again in coming months, or if inflation declines materially, the Fed could still ease later this year,” JP Morgan said in a Friday note.
“However, we expect the labor market to tighten in the second quarter and the disinflation process to be quite gradual.”
Traders are betting on a 95% chance that the Fed will leave rates unchanged at its January meeting, according to the CME FedWatch tool, up from 86% before the data.
Goldman Sachs and Barclays, which had forecast cuts in March and June, now expect a 25 basis point cut in September and December respectively, following the June cut. “If the labor market stabilizes as we expect, the FOMC will likely shift from risk management to normalization,” Goldman said in a note on Sunday, as it cut its 12-month US recession forecast to 20% from 30%.
Morgan Stanley also revised its forecast on Friday to rate cuts in June and September from January and April.
Wells Fargo and BofA Global Research both maintained their bets on March-June and June-July cuts, respectively.
“The mix of data is consistent with our view that breakeven job growth may decline even faster (labor supply shock) than the Fed will admit,” BofA said.
Meanwhile, the battle between President Donald Trump and Fed Chairman Jerome Powell intensified after Powell said on Sunday that the Trump administration had threatened him with criminal charges, fueling concerns about the central bank’s independence.
Powell called this move a “pretext” to gain more influence over the interest rates that Trump wants to dramatically lower.
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