Fed staff earning their pay

The Federal Reserve’s job keeps getting more interesting. A strong labor market and stubborn inflation have reduced the likelihood for cuts in the federal funds rate to little more than a single quarter-point one in 2025—a far cry from the projections they issued just a few months ago.

On Friday, the Labor Department reported that the US economy added 256,000 new jobs in December and the unemployment rate fell from 4.2% to 4.1%. Average hourly earnings rose 3.9% over the last year, down slightly from 4.0% in November. Weekly jobless claims fell from 211,000 to 201,000, and service sector surveys point to continued expansion. All told, the economy ended 2024 in good shape. 

The first read on 2025 comes from the University of Michigan Consumer Sentiment survey, which eased lower. Consumer concern over the current cost of living diminished yet worry about future inflation and monetary policy increased sharply. Nearly one-third of respondents mentioned the impact of potential tariffs, up from 2% prior to the general election. Tellingly, almost one-quarter said that purchasing items now would help them avoid future price hikes. That’s a mindset not widespread since 1990, and one more reminiscent of the turbulent 1970s. For instance, 41% of respondents held that opinion in 1978. It will be interesting to see if the upcoming FOMC meeting (January 29) changes this sentiment as markets currently expect no change in rate policy.