Drop in jobless rate anticipated to support Fed's decision to maintain pause on interest rate reductions

Unexpected Drop in Unemployment Influences Fed’s Rate Decisions

The unemployment rate unexpectedly declined in December, a development that is likely to prompt the Federal Reserve to pause any interest rate reductions at its upcoming meeting.

Krishna Guha, who leads global policy at Evercore ISI, commented, “With unemployment falling to 4.4% in December and November’s figure also revised slightly lower to 4.5%, the Fed is positioned to maintain current rates in January and potentially delay any changes until March.”

According to data from the Labor Department released Friday, the U.S. economy added 50,000 jobs last month, falling short of the anticipated 70,000. The jobless rate dropped to 4.4%, better than the expected 4.5%. The participation rate among prime-age workers remained steady at 83.8%, near its highest point since the pandemic.

Despite the positive unemployment figures, December’s modest job growth capped a year marked by a steady slowdown in hiring. Job gains for the two previous months were revised downward, a pattern that continued throughout 2025.

October’s employment numbers were adjusted down by 68,000, shifting from a loss of 105,000 to a loss of 173,000. November’s gains were also revised down by 8,000, from 64,000 to 56,000 jobs added. Combined, these changes mean October and November saw 76,000 fewer jobs than initially reported. Factoring in these revisions, the average over the past three months now shows a loss of 22,000 jobs.

Lydia Boussour, senior economist at EY-Parthenon, noted that the December report signals “a clear slowdown” and highlights a labor market that is struggling to gain momentum, with job creation barely keeping pace with the minimum needed.

In 2025, only 584,000 jobs were added, a sharp decline from the 2 million increase in 2024, making it the weakest annual job growth outside of a recession since 2003.

Boussour anticipates that job growth will remain subdued, averaging around 30,000 per month in the first half of the year, and expects the unemployment rate to gradually rise toward 4.8%. She does not foresee a rate cut this month, but predicts the Fed will lower rates in March and June.

Federal Reserve’s Recent Actions

U.S. Federal Reserve Chair Jerome Powell speaks at a press event in Washington, D.C., on December 10, 2025. On that day, the Fed reduced its target range for the federal funds rate by 25 basis points to 3.5–3.75%, marking its third rate cut of the year. (Photo by Li Yuanqing/Xinhua via Getty Images)

Looking Ahead: What’s Next for the Fed?

Stephen Brown, an economist at Capital Economics, pointed out that by March, the Fed will have access to two more months of data, allowing for a clearer assessment of whether the labor market is stabilizing.

Brown added, “The recent drop in unemployment and annual adjustments to seasonal factors suggest the labor market is in slightly better shape than some FOMC members feared, indicating the Fed is unlikely to rush into further rate cuts.”

Together with strong GDP growth projections for the fourth quarter, Brown believes these factors will likely keep the Fed from making any immediate changes to interest rates.

While many analysts expect the Fed to implement several rate cuts this year, Michael Feroli, chief economist at JPMorgan, predicts the central bank will maintain its current stance throughout 2025. He observes that the labor market appears to be stabilizing at a lower level of demand and supply, with little evidence of further weakening.

“We now expect the Committee to keep rates unchanged at the end-of-month meeting,” Feroli said. “After that, we anticipate the Fed will hold the target range steady at 3.5–3.75% for the remainder of the year.”

Perspectives on Job Growth and Policy

Some remain cautious about the prospect of a rebound in payroll growth. Deputy Labor Secretary Keith Sonderling told Yahoo Finance that recent investments and trade agreements are expected to bring manufacturing jobs back to the U.S. and support job growth in sectors beyond healthcare. He also mentioned ongoing efforts with the private sector to ensure American workers are equipped with the necessary skills as new jobs emerge.

Regarding monetary policy, Sonderling believes that rate reductions are both appropriate and needed.

“The administration has consistently advocated for rate cuts, and as these are implemented, we expect to see continued job creation, rising wages, lower inflation, and stronger GDP forecasts,” Sonderling said in an interview.

Fed Leadership and Internal Divisions

The composition of the Federal Reserve is adding complexity to policy decisions. The arrival of new regional Fed bank presidents with more hawkish views, along with a new Fed chair expected in May who may favor additional rate cuts, is likely to deepen internal disagreements about the direction of monetary policy.

Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, remarked, “Until the data provides clearer guidance, divisions within the Fed are likely to persist. While lower rates are probably on the horizon this year, markets may need to remain patient.”