Hot US jobs report casts further doubt on Fed interest rate cuts

Employers added 256,000 jobs last month, well above Dow Jones estimate of 155,000

The Federal Reserve building in Washington. The Fed is currently searching for the so-called neutral rate Reuters

US hiring soared past expectations last month, roiling markets and casting further doubt that the Federal Reserve will cut interest rates this quarter.

The Labour Department on Friday reported that US employers added 256,000 jobs last month, up from 212,000 gains in November and well above the 155,000 Dow Jones estimate. The unemployment rate dropped by 0.1 per cent to 4.1 per cent, below estimates of 4.2 per cent.

The 10-year Treasury yield rose more than 10 basis points to 4.786 per cent, while the two-year Treasury yield spiked by nine basis points to 4.36 per cent. One basis point equals 0.01 per cent. Yields and prices move in opposite directions. The 30-year Treasury hit a new 52-week high at 4.985 per cent while the dollar also strengthened.

US major indices were all in the red during morning trading. The Dow Jones Industrial Average tumbled 567.71 points - or 1.36 per cent - while the S&P 500 dipped by 1.42 per cent. The Nasdaq Composite dropped 1.7 per cent while the small-cap Russell 2000 Index was down 2.02 per cent.

Treasury yields have surged in recent months, undercutting moves by the Federal Reserve since September to reduce its benchmark interest rate. Driving the recent surge is the belief that inflation will be firmer than expected.

Friday's strong jobs report also comes as inflation remains above the Fed's 2 per cent goal. That has also dimmed expectations of a further rate cut.

"A rate cut at its meeting on January 29 is off the table, and March looks increasingly unlikely as well," Wells Fargo economists wrote to clients.

Markets widely expect the Fed to keep rates steady through at least the first quarter, CME Group data showed.

“The robust labour market and persistently high inflation provide compelling reasons for the Fed to maintain its current policy stance,” Nigel Green, chief executive of wealth management firm deVere Group, said.

Since its December rate cut - which brought the benchmark target range to 4.25 to 4.50 per cent - a slate of Fed officials have suggested they are willing to take a more cautious approach on reducing policy moving forward.

Minutes released from the Fed's December meeting underscored the point, noting they were "at or near the point at which it would be appropriate to slow the pace of policy easing".

Fed Governor Michelle Bowman, considered a hawkish voice on the bank's rate-setting committee, used similar language in remarks on Thursday when discussing her economic outlook.

“I supported the December policy action because, in my view, it represented the committee's final step in the policy recalibration phase,” she said.

The Fed is currently searching for the so-called neutral rate, the point at which policy neither expands nor restricts the economy. The rate cannot be observed directly.

Ms Bowman said she believes the current rate is closer to her estimate of neutral. Meanwhile, Fed Governor Christopher Waller - another permanent voting member on the rate-setting committee - said he would continue to support further rate cuts this year.

The Fed holds its next two-day policy meeting from January 28-29.