The U.S. economy added a lot more workers than expected last month, but instead of cheering the progress, some experts are worried about how the Fed could interpret the numbers.

According to the Department of Labor, employers added 216,000 workers to payrolls in December—up from 173,000 in November and squashing forecasts of 175,000.

The unemployment rate remained unchanged at 3.7%, also better than forecasts calling for a slight uptick to 3.8%.

Normally, a stronger than expected jobs report is something to cheer. But as Creditnews has reported, this is no ordinary economy.

Although the job numbers are positive at the surface, they signal that the Fed might be having a harder time cooling the economy now that it has stopped raising interest rates.

The Fed hiked rates 11 times in 2022 and 2023 in an attempt to slay the inflation dragon. While inflation has cooled significantly from the massive 9.1% spike in mid-2022, it remains above the central bank’s 2% target.

Some economists are concerned that an unrelenting labor market will raise wages and make the Fed think twice before cutting rates. “This report does not scream rate cuts,” said Olu Sonola, the head of U.S. regional economics at Fitch Ratings, a major credit rating agency.

“Following the report, the market pushed back its timing of a first rate cut from the Fed,” Luke Conway, JPMorgan’s senior associate of wealth management, said in a report.

In the meantime, “investors remain on edge about the ultimate rationale for lower interest rates,” he said.

The importance of timing

In December, the Fed gave its strongest signal yet that rates would come down in 2024. Its officials expect to cut rates three times for the year, amounting to 0.75%.

Wall Street is divided on the pace and timing of Fed cuts. Before the December jobs report, the market eyed March for the first cut. It isn't so convinced anymore.

As Creditnews reported, just a few weeks ago, the market priced in a 75% probability of a rate cut in March. But the odds have since fallen to around 61%, according to CME’s FedWatch Tool.

Timing is important for the Fed because it’s trying to engineer a so-called “soft landing”—or stopping inflation without tipping the economy into a recession.

Some economists call on the Fed to act sooner because the economy is already running out of steam. According to the Conference Board, U.S. GDP is forecast to grow a mere 0.9% in 2024.

Certain segments of the economy, including the housing market and large corporations, want the Fed to cut rates more aggressively.

It’s estimated that more than $3 trillion in corporate debt needs to be rolled over in the coming years. Without rate cuts, these companies will be forced to refinance at much higher rates, potentially elevating their default risks, according to middle market tax consultant RSM.

But is the labor market really that strong?

The December jobs report alone probably isn’t enough to derail the Fed’s plan to lower interest rates. Especially when you dig deeper into the data.

Although a 200,000-plus hiring pace is considered resilient, it’s worth mentioning that the Labor Department regularly revises down its monthly job growth numbers.

For example, the U.S. economy added only 105,000 jobs in October—not the 150,000 that was originally reported. And in November, employers only hired 173,000 workers, much lower than the initial estimate of 199,000.

As Creditnews reported, similar massive downgrades were also reported in August and September.

The monthly job numbers are also skewed by the presence of multiple job holders. According to Charles Schwab, the number of full-time workers in December fell by the most since April 2020.

As a result, “trying to assess a clear labor market narrative continues to be a challenge, wrote Charles Schwab analysts Liz Ann Sonders and Kevin Gordon.