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Investing.com -- The Federal Reserve is now expected to keep interest rates hold this year, Macquarie said after the January jobs data showing U.S. economic exceptionalism is far from over forced a rethink on the rate-cut path ahead.
"Our updated view is for no change in the fed funds rate during 2025 with it likely to remain in the 4.25 to 4.5% range. Previously we had suggested there would be just one further 25 bps cut in either March or May," strategists from Macquarie said in a recent note.
The call for no rate cuts comes in the wake of the January jobs report that "sent an upbeat message about the labor market and overall economic growth," The strategists added.
The U.S. economy created 143,00 new jobs in January, missing economists’ estimates of 176,000 jobs, but the strategists believe the softer headline number "may have been weighed down by adverse weather."
Leading up to Friday’s jobs report, many were expecting the Bureau of Labor’s annual adjustments to payrolls for prior months to show sharp downward revisions.
But the report showed upward revisions to recent payrolls months pointing to an even "steeper trend acceleration," Macquarie said.
Some, however, have cautioned against reading too much into the report as an indicator for underlying economic growth as the labor market is a lagging indicator.
"Employment tends to be a lagging indicator ion in terms of the forward outlook for underlying economic strength," Jordan Rizzuto, Managing Partner and Chief Investment OfficerGammaRoad Capital Partners (WA:CPAP) told investing.com’s Yasin Ebrahim in an interview earlier this week.
The unemployment rate fell to 4% from 4.1% underscored the strength in the economy, potentially forcing the Fed to recalibrate its projections for U-3, or the unemployment rate, at its March meeting.
"It is now highly likely that FOMC participants will need to revise down their end-25 forecasts for U-3 in March," the company said. In Fed’s December projections was for unemployment at 4.3% by year end 2025, implying an upward drift, but data "since that time suggest the opposite direction."
The unexpected rise in average weekly earnings, meanwhile, fuels further worries about renewed inflation at a time when inflation expectations are on the up and up. The University of Michigan survey on Friday showed one-year inflation expectations moved up to 4.3% from 3.3% -- the highest reading since November 2023.
The uptick in inflation expectations suggests "consumers are increasingly concerned about the potential stagflationary effects of President Donald Trump’s policy plans," Capital Economics said.