This morning’s December jobs report, which is expected to show solid yet decelerating growth in the labor market, may help the Federal Reserve tap the brakes on the fervor for interest rate cuts. It’s the most significant snapshot of the U.S. jobs picture since the Fed signaled last month that it was done hiking rates amid mounting evidence that inflation is declining. The pivot helped fuel a year-end market rally as well as hopes for an initial rate cut for the March FOMC meeting. Fed officials have since tried to temper expectations. Fed meeting minutes released this week showed there was no clear timeline for easing monetary policy amid heightened economic uncertainty. The December jobs data will indicate whether the Fed may proceed with a little more urgency. “It’s a question of, is the labor market going to be an extra reason for the Fed to cut or not?” Employ America executive director Skanda Amarnath told MM. Let’s get into how today’s jobs report fits into the tug-of-war between Wall Street and the Fed. What economists expect Economists polled by Bloomberg forecast that nonfarm payrolls likely increased by a net 175,000 in December and that the unemployment rate edged up to 3.8 percent. That would be a dip from the 199,000 increase in October and well below the monthly average for the prior year. It would be a sign of continued cooling during an unexpectedly strong period of job growth that has persisted despite elevated interest rates. Why it matters Fed watchers believe it would take a more significant slowdown — something below 100,000 jobs added — to accelerate rate cuts. “Anything between 150,000-200,000 — that’s pretty healthy,” State Street senior macro strategist Noel Dixon told MM. “If you get below 100,000 … people will start to get scared. Then we’ll start talking about a hard landing.” But Dixon says March rate cuts will be off the table if the number comes in line or slightly above expectations. “The market might have gotten ahead of itself with the six rate cuts that it has priced,” he said. “By any standard, the U.S. economy is still pretty strong.” There’s another view that the Fed might want to act sooner before something in the economy breaks. Amarnath, with Employ America, said a smart tactic for the Fed would be to look at January’s inflation data, and if it confirms the trend from the last several months, “it makes a lot of sense to start to tee up a really active conversation about cuts.” “You leave these high interest rates around for too long, you will run into trouble eventually,” he said. “This has been a core Fed mistake for the previous three decades.” How voters and businesses see it A JPMorgan Chase survey of small and midsize business leaders released this week showed that their recession expectations are waning, but most are not optimistic about the U.S. economy as a whole. A slight majority of Americans continue to disapprove of President Joe Biden’s handling of the economy, according to an Economist/YouGov poll conducted in late December and early January. Martha Gimbel, who served on Biden’s Council of Economic Advisers and is now a research scholar at Yale Law School, said it’s been a “gang-busters recovery” coming out of the pandemic but some sectors are still lagging behind. New analysis from Gimbel found that the industries that have seen the strongest job growth the last 12 months in a Covid-19 bounceback are scenic and sightseeing transportation followed by performing arts, spectator sports and related industries. It’s evidence, she said, that there’s still some room for the labor market to grow. “Most of us have put the pandemic out of our minds,” she said. “But not every industry has been able to do so.” Happy Friday — What’s your take on the job numbers? Send a note to zwarmbrodt@politico.com.
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