An Anticipated Commencement Of Interest Rate Reductions By The Fed In May

The monthly jobs report from the Labour Department revealed that employers increased payrolls by 199,000 employees in November, exceeding the 180,000 increase anticipated by economists. Additionally, the unemployment rate unexpectedly declined from 3.9% in October to 3.7%.

Hourly earnings increased by a marginal 0.4% month-over-month, exceeding expectations and accelerating from the previous month. However, there was also an increase in the labour force participation rate to 62.8%, which mitigated concerns that an inflated labour market could impede the Fed's efforts to combat inflation.

As inflationary pressures eased, U.S. consumer sentiment improved more than anticipated in December, according to a separate report released on Friday.

Anticipatedly, the U.S. central bank will maintain interest rates within the existing range of 5.25%-5.50% at its meeting next week; policy has been on hold since July. Prior to Friday's employment report, traders had estimated a 60% chance that Fed rate cuts would begin in March. However, after the report, that probability dropped to just under 50%, with May being the more likely month for the first reduction.

Additional rate reductions are anticipated for the remainder of 2024, with the policy rate expected to conclude the year in the range of 4% to 4.25 percent. The Federal Reserve is adjusting borrowing costs downward, not in response to a deteriorating labour market, but to match the anticipated ongoing deceleration in inflation.

Analysts predict that the extent to which inflation improves will influence the timing of the Federal Reserve's shift towards interest rate reductions.

"We maintain our call for the Federal Reserve to begin rate cuts by mid-year; however, this is contingent on the continuation of a downward trend in inflation and a further deterioration in economic activity," Kathy Bostjancic, an economist at Nationwide, wrote in response to the report.

Policymakers at the Federal Reserve will deliver their individual assessments of the trajectory of the economy, inflation, and interest rates in the coming year on Wednesday, as they conclude their final meeting of the year.