The December jobs report upended market expectations, forcing top Wall Street investment banks to abandon their forecast for further interest rate cuts in 2025. A labor market exceeding even the most optimistic estimates has traders now bracing for the unthinkable: the return of interest rate hikes.

In a note released Friday, Bank of America economist Aditya Bhave said the bank no longer expects any additional rate cuts this year, a sharp U-turn from its prior prediction of two reductions.

"The December jobs report was extremely solid across the board," Bhave said, adding, "We think this A+ jobs report closes the door for additional rate cuts."

December’s A+ Jobs Report

The December nonfarm payrolls figure came in at 256,000, far exceeding the bank's own expectations of 175,000 and crushing the consensus estimate of 160,000. The robust labor market data signals continued resilience in the U.S. economy, with wage growth outpacing inflation and supporting purchasing power.

Bank of America also highlighted the strength of income growth, with the aggregate payrolls index — a proxy for total wage income — rising 0.4% month-over-month and 5.4% on a three-month annualized basis.

With wages growing faster than prices, consumers retain significant spending power, offsetting fears of an economic slowdown, according to the investment bank.

Yet, while this is good news for the U.S. consumer, it is less so the Federal Reserve grappling with a resurgence in price pressures.

‘The Conversation Should Move To Hikes’

Bhave said inflation remains "above target" and warned that risks are skewed to the upside, noting robust economic activity as a key factor.

"The conversation should move to hikes," he said, indicating that the Federal Reserve could raise rates if core inflation exceeds 3% or long-term inflation expectations lose its anchor.

This marks a dramatic shift in tone, with Bank of America not only ruling out further easing despite earlier predictions but also flagging the potential risk of a new hiking period.

In November 2024, the core Personal Consumption Expenditure price index — Fed’s favorite inflation gauge — was up 2.8% annually.

Market Reaction: Betting On A Long Wait

Traders in the fed funds futures market have drastically recalibrated their expectations. Prior to the jobs report, a rate cut in the first quarter of 2025 was seen as a distinct possibility.

Now, the odds of a cut by the Fed's March meeting have dwindled to just 23%, according to CME's FedWatch tool.

The first meeting with significant probabilities of a cut now appears to be in July, with a 70% chance of a 25-basis-point reduction. Even then, a fully priced-in rate cut is unlikely until October 2025, fed futures indicate.

The recalibration of interest rate cuts is producing shockwaves across markets. On Friday, indices witnessed notable declines, with the S&P 500 — tracked by the SPDR S&P 500 ETF Trust SPY — down by 1.4% during afternoon trading in New York.

Meanwhile, speculation over a potential rate hike is gaining momentum.

On Kalshi, a CFTC-regulated prediction platform, the market for "Next Fed rate hike?" has surged to a 33% probability of an increase in the fed funds rate by Dec. 31, 2025, up sharply from 20% before the jobs report. For every dollar wagered on "Yes," the payout now stands at $3.

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