- Friday’s monthly jobs report blew away forecasts, pointing to an economy and labor market that are more robust than expected. That suggests to Bank of America that the Federal Reserve is already done cutting interest rates.
The Federal Reserve’s rate-cutting cycle is already done as the latest jobs report revealed an economy and labor market that are stronger than expected, according to analysts at Bank of America.
That bearish view came in a note on Friday, after the Labor Department reported that payrolls grew by 256,000 last month, up from 212,000 in November and well above the forecast for 155,000. The unemployment rate dipped to 4.1% from 4.2%, also beating expectations.
“Given a resilient labor market, we now think the Fed cutting cycle is over,” BofA predicted. “Inflation is stuck above target and risks are skewed to the upside. Economic activity is robust. We see little reason for additional easing.”
In fact, not only are rate cuts finished, BofA added that the “conversation should move to hikes,” which could be in play if the core personal consumption expenditure inflation reading exceeds a 3% annual rate and long-run inflation expectations start to move higher.
That’s marks a sharp reversal from September, when the Fed cut rates for the first time since 2020, kicking off what was thought to be an easing cycle that would extend well into 2025.
Instead, the central bank lowered rates by 100 basis points via three cuts last year, and forecasts for four more cuts this year have been trimmed repeatedly.
Wall Street is now pricing in just one cut this year, sometime in the third quarter, though the odds have narrowed. That diminished outlook helped send the 10-year Treasury yield up 8 basis points on Friday to 4.76%, the highest since November 2023, and sank stocks.
In a separate note on Saturday, Apollo Chief Economist Torsten Sløk maintained his view that there’s 40% chance the Fed will raise rates this year, saying that the economy is re-accelerating.
“The bottom line is that momentum in the economy is strong, and the narrative that monetary policy is restrictive is wrong,” he said.
BofA echoed that sentiment, saying the jobs data should reinforce the view that the Fed’s monetary policy is not yet meaningfully restrictive on overall activity.
The data also show wage inflation continues to outpace price inflation, meaning consumers’ greater purchasing power can keep fueling the economy even if hiring slows, the note added. Still, BofA believes there’s a “high bar” to meet before the Fed starts raising rates.
Meanwhile, Wall Street has started pricing in expected policies from the incoming Trump administration. President-elect Donald Trump has vowed across-the-board tariffs, an immigration crackdown, and tax cuts—initiatives that economists largely view as inflationary.
But Michael Pettis, a finance professor at Peking University’s Guanghua School of Management, has said that tariffs can boost U.S. Jobs, wages, and the economy.