The December U.S. jobs report was just good enough to persuade investors that the Federal Reserve won't cut interest rates again in January. Stubborn inflation could ensure the Fed stands pat.
The consumer-price index is forecast to rise 0.3% in the final month of 2025. Ditto for the so-called core CPI rate seen as a better barometer of inflation trends. The report comes out Tuesday morning.
If the forecasts are spot on, the rate of U.S. inflation will cling close to 2.7%, leaving it stuck well above the Fed's 2% inflation target.
Even with prices still rising faster than the Fed would like, the central bank has cut interest rates three times in a row since September because it is more worried about the labor market.
Hiring has slowed to a crawl and the unemployment rate recently rose to a four-year high. Were the labor market to get any worse, it could jeopardize the five-year-old U.S. expansion.
That's why the December jobs report came as something of relief. It was not a great outcome by any stretch, but employment rose by 50,000 and the unemployment rate slipped to 4.4%, marking the first drop in seven months.
Thomas Barkin, president of the Richmond Fed, said the report confirmed the U.S. was stuck in a low-hiring environment. Still, "it was encouraging" to see signs of a more stable labor market.
Perhaps the most encouraging part of the report was a modest increase in hourly pay for American workers. A separate report also showed muted labor costs.
While wages are still rising faster than inflation - a good thing for workers - they are not rising so fast as to make inflation any worse.
"A cooling labor market should help contain price pressures," said Seema Shah, chief global strategist at Principal Asset Management.
Just so long as the labor market doesn't get too cool.
The Fed would cut rates quickly and aggressively if hiring nosedived, layoffs piled up and the unemployment rate rose from its current 4.4% level toward 5%. So far, there's no sign of that.
Inflation, meanwhile, is likely to hover well above the Fed's 2% target through the early part of 2026. Wall Street SPX DJIAeconomists say a hangover from higher U.S. tariffs will keep inflation somewhat elevated.
Adding to the problem are quality-of-data complications.
The record 43-day federal shutdown in October and November, for example, disrupted efforts by the Bureau of Labor Statistics to collect data on prices.
Part of the result was a smaller increase in inflation in the November CPI than expected.
The payback could come in December with an above-average increase in inflation. Some analysts even say prices could rise twice as fast as in the prior month.
"The December report should correct some of these biases, and will thus result in a rather firm month-on-month increase," economists at J.P. Morgan wrote in a note to clients.
A bigger long-term problem has been a tendency of the CPI to show exaggerated price increases early in a new year, followed by a slowdown in the spring. That has also made it harder for the Fed to glean inflation trends.
The latest potential obstacle for the Fed is a looming federal investigation of Chair Jerome Powell by the Trump administration.
Fed officials always say publicly they don't let politics influence their rate decisions, but analysts wonder if the legal attack will add to the reluctance of Fed officials to reduce rates in January so as not to be seen caving in to the White House.
However the legal dispute unfolds, the Fed is still widely expected to cut its benchmark interest rate a few times this year.
The first reduction probably won't be until June, when a new Fed chief is in place, according to the FedWatch tracking site. Powell's term as chairman ends in May.
Even under a Trump ally as chair, the Fed won't have as much leeway to cut rates much further, economists say, if inflation remains closer to 3% than 2%.
