A surprise drop in the unemployment rate in December is likely to keep the Federal Reserve on course to take a breather from cutting interest rates later this month.
“The fall in unemployment to 4.4% in December, with November also revised fractionally lower to round to 4.5 rather than 4.6%, confirms that the Fed will be able to keep rates on hold in January and kick the can to March,” said Krishna Guha, head of global policy for Evercore ISI.
The US economy added 50,000 jobs in December, according to Labor Department data published Friday, below expectations for job gains of 70,000. The unemployment rate fell to 4.4%, below expectations for a drop to 4.5%. The labor force participation rate for prime-age workers held steady at 83.8%, close to the post-pandemic high.
Read more: How a Fed rate cut affects your bank accounts, loans, credit cards, and investments
Still, the cooler payroll number for December caps a year that showed consistent slowing job growth. Job gains figures were revised lower for the previous two months — a trend that persisted throughout 2025.
October was revised down by 68,000, from a loss of 105,000 to a loss of 173,000, and the change for November was revised down by 8,000, from 64,000 jobs added to 56,000. With these revisions, employment in October and November combined is lower by 76,000 jobs. Incorporating the downward revisions, the three-month average looks weaker at 22,000 jobs lost.
EY-Parthenon senior economist Lydia Boussour said the December jobs report highlights “a clear loss of momentum” and “underscores a labor market stuck in low gear, with job growth barely clearing its breakeven pace.”
Last year, the economy added just 584,000 jobs, compared with a gain of 2 million in 2024, marking the weakest annual increase outside a recession since 2003.
Boussour says she expects job growth to remain well below trend, averaging only about 30,000 per month in the first half of the year, with the unemployment rate gradually drifting higher toward 4.8%. For that reason, while she doesn’t anticipate a rate cut later this month, but expects the Fed will cut in March and June.
Capital Economics economist Stephen Brown said that by March, the Fed will have another two months of data and will be able to better judge whether the labor market is starting to stabilize.
“The fall in the unemployment rate in December and the annual revisions to the seasonal factors leave the labor market looking in slightly better health than the more dovish members of the FOMC feared, suggesting that the Fed will be in no rush to resume interest rate cuts,” said Brown.
Together with signs that GDP growth is on track for a strong fourth quarter, Brown thinks this should keep the Fed on hold for at least the next few months.
While many economists think the Fed will end up cutting a few times this year, JPMorgan chief economist Michael Feroli sees the central bank holding pat all year, noting that the job market looks to be stabilizing at a level of lower demand and supply for workers, with what he calls few signs of further deterioration.
Read more: Jobs, inflation, and the Fed: How they’re all related
“We now look for the Committee to be on hold at the meeting at the end of the month,” he said. “After that we see the Fed holding the target range for the funds rate steady at 3.5-3.75% for the rest of the year.”
While some are skeptical of payroll growth rebounding, Deputy Labor Secretary Keith Sonderling told Yahoo Finance on Friday that investment and trade deals by the administration will bring back jobs in manufacturing that have been previously offshored and will boost job growth across sectors outside of healthcare. Sonderling said the Labor Department is also having discussions with the private sector to make sure that when jobs do come, Americans are primed with the skills needed.
When it comes to the Fed, Sonderling said rate cuts are appropriate and necessary.
“This administration has been clear that rate cuts need to happen, and as those continue to happen, as we’ve seen, we’re going to continue to see more jobs, more job growth, wages going up, inflation continuing to go down, and those GDP numbers continue to be forecasted to increase,” Sonderling said in an interview.
The makeup of the Fed is another complicating factor. New regional Fed bank presidents, who lean hawkish, along with the installation of a new Fed chair in May, who is expected to lean toward more rate cuts, is likely to intensify divisions within the central bank about the path forward.
“Until the data provide a clearer direction, a divided Fed is likely to stay that way. Lower rates are likely coming this year, but the markets may have to be patient,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management.
Jennifer Schonberger covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.
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