January 2025 NFP Report: A Game Changer for Fed Rate Cuts?

The highly anticipated January 2025 Non-Farm Payrolls (NFP) report was released today, bringing new insights into the U.S. labor market and potential implications for Federal Reserve policy. While headline job creation fell short of expectations, strong upward revisions to previous months, combined with higher-than-expected wage growth, suggest a resilient economy. These factors are leading markets to reassess the timing and extent of potential Fed rate cuts in 2025.

Key Highlights from the January NFP Report

• Job Creation: The U.S. economy added 143,000 jobs in January, missing the forecast of 169,000 and significantly lower than December’s revised 307,000.
• Unemployment Rate: Dropped to 4.0%, slightly below the 4.1% expected.
• Wage Growth: Average hourly earnings increased by 0.5% MoM (above the 0.3% forecast), while the YoY figure stood at 4.1%, unchanged from December.
• Private Nonfarm Payrolls: Increased by 111,000, well below expectations of 141,000.
• Manufacturing Payrolls: A notable positive surprise at +3,000 jobs, versus a forecast of -2,000.
• Government Payrolls: Added 32,000 jobs, slightly below the prior month’s 34,000.

Revisions to Previous Months: A Bullish Indicator?

One of the most striking aspects of this report was the upward revision of prior months:

• November’s job growth was revised up to 261,000 from 212,000.
• December’s job growth was revised up to 307,000 from 256,000.

These adjustments add a combined 100,000 jobs to previous estimates, indicating stronger job growth than initially reported and suggesting that economic momentum remains robust. This has major implications for Federal Reserve policy, as stronger labor conditions may deter policymakers from easing monetary policy too soon.

Market Reactions: Equity Selloff and Rising Bond Yields

The financial markets reacted swiftly to the report:

• Equities: U.S. stock indices turned sharply lower after the release, with the S&P 500, Dow Jones, and Nasdaq futures falling as investors reassessed the likelihood of aggressive Fed rate cuts. However, after the opening bell on Wall Street, all major indices began to rise, moving into positive territory. This upward movement was primarily driven by higher-than-expected average hourly earnings and stronger-than-anticipated revisions to the November and December Non-Farm Payroll (NFP) reports, suggesting that economic growth remains robust.
• Bond Yields: Treasury yields spiked, with the 10-year yield rising towards 4.50% and the 2-year yield climbing to 4.26%, reflecting reduced expectations for near-term rate cuts.

CME Fed Watch Tool: Markets Price in Fewer Cuts

Prior to the NFP release, market expectations were tilting toward multiple rate cuts in 2025. However, after the release, traders quickly adjusted their outlook:

March 2025 Fed Meeting (March 19, 2025)

• 91.5% probability that the Fed keeps rates steady at 4.25-4.50% (up from 84.0% yesterday).
• Only 8.5% probability of a 25bps rate cut (down from 16% a day earlier).

May 2025 Fed Meeting (May 7, 2025)

• The probability of rates remaining at 4.25-4.50% increased to 67.3% (up from 61.2% yesterday and just 50% a month ago).
• The likelihood of a 25bps rate cut (to 4.00-4.25%) dropped to 30.4% (from 34.5% a day prior).

This shift underscores that investors now see a less aggressive easing cycle, with a reduced chance of early rate cuts.

Implications for the Fed’s Monetary Policy

The combination of strong wage growth, upward job revisions, and a still-tight labor market reduces the urgency for the Federal Reserve to cut interest rates aggressively.

Fed officials have repeatedly emphasized that they need to see clear signs of disinflation and a softening labor market before considering rate cuts. Today’s report, however, suggests that economic strength could allow them to delay or minimize cuts in 2025.

While rate reductions are still expected at some point this year, the timeline could shift further into mid-2025, with a higher possibility that the Fed waits until June or later before making any move.

Impact on Asset Classes

The shift in rate expectations will likely have broad market implications across asset classes:

1. Equities:

• The stock market is likely to remain under pressure in the short term, as expectations of fewer and later rate cuts weigh on valuations.
• Growth stocks and tech companies, which have benefited from easing expectations, could see increased volatility.

2. Bonds:

• Treasury yields have moved higher, reducing bond prices.
• Investors expecting sooner rate cuts may have to adjust their portfolios to account for prolonged tight monetary policy.

3. U.S. Dollar (USD):

• The dollar strengthened post-NFP as markets reassessed the Fed’s stance.
• Higher-for-longer interest rates should support USD strength against other major currencies.

4. Commodities (Gold):

• Gold prices may face pressure as higher bond yields make non-yielding assets less attractive.

Final Thoughts: A Wake-Up Call for the Rate Cut Narrative?

Today’s NFP report has shifted market expectations significantly. While headline job creation disappointed, the strength in wage growth and the substantial upward revisions to prior months indicate a still-tight labor market. The market reaction—higher bond yields, falling stocks, and a stronger USD—reflects a growing realization that the Fed may not be as dovish as previously expected.

Looking ahead, February’s inflation data (CPI and PPI) will be crucial in determining whether the Fed sticks to its cautious approach. If inflation remains sticky, combined with today’s strong labor data, the central bank may have even less urgency to cut rates in the near term.

For traders and investors, this report serves as a reminder that the Fed’s policy path remains highly data-dependent. As of now, the case for multiple early rate cuts has weakened, and market participants will need to recalibrate their expectations accordingly.