Wall Street Slashes Interest Rate Cut Bets After Jobs Data: Are Hikes Back On The Table?

Wall Street analysts are rethinking their interest rate forecasts after December's unexpectedly strong jobs report shattered previous expectations for a slowing labor market, raising questions about the Federal Reserve's next move.

In a note shared Monday, Goldman Sachs economist David Mericle adjusted his projections for Fed policy in 2025, cutting his expectations for three rate cuts to just two, and reducing the 2026 forecast from three cuts to one.

"We made the change because the employment report alleviated some of the lingering concerns about recent labor market softening," Mericle said.

December's payroll employment surged by 256,000, well above the anticipated 160,000, while the unemployment rate ticked lower to 4.1% from 4.2%. The data bolstered the case for a resilient labor market and complicated the path toward further monetary easing.

Hikes On The Horizon?

The strong labor market is forcing some analysts to reconsider the possibility of rate hikes instead of cuts.

Bank of America economist Aditya Bhave shook markets last Friday, saying, "Given a resilient labor market, we now think the Fed cutting cycle is over. Inflation is stuck above target," before adding, "the conversation should move to hikes."

Bhave stressed that additional hikes could be on the table if year-over-year core PCE inflation surpasses 3% and inflation expectations begin to "de-anchor." His comments rattled investors, who had largely priced in a gradual easing of monetary policy.

While Goldman Sachs remains skeptical of rate hikes, particularly in response to one-off inflation drivers like tariffs, the bank warned of potential scenarios where inflation could rise meaningfully.

Mericle indicated that "more extreme tariff scenarios than we include in our baseline, such as a universal 10% tariff, would raise consumer prices more substantially." However, he highlighted that such inflationary shocks would likely destabilize equity markets and reduce economic growth, making the case for hikes less plausible.

Bond And Stock Markets React

The December jobs report and subsequent analyst notes sent shockwaves through financial markets.

Wall Street veteran Ed Yardeni said payrolls’ data "cemented investors' sense that the Fed should pause its easing."

Both bond and stock markets reacted sharply, with the selloff reflecting a recalibration of expectations. Yields on 30-year Treasury bonds briefly hit the 5% mark, sending the iShares 20+ Year Treasury Bond ETF TLT down to 14-month lows.

Rising Treasury yields weighed on stocks. The SPDR S&P 500 ETF Trust SPY, which tracks the S&P 500 index, has wiped out its post-election rally,

"We're not surprised by this January correction," Yardeni said.

"The markets are gaining a more realistic sense of the current situation, recognizing that interest rates will stay higher and normal for longer, while the economy remains resilient. A strong Q4 earnings season should help to restore shaken investors' confidence," the investor added.

Despite the turbulence, Yardeni indicates the market's shift could represent a healthy reset, aligning expectations with economic realities.

What Do Fed Futures And Betting Markets Say?

Market-implied probabilities reveal growing uncertainty about the Fed's future moves.

CME Group's FedWatch tool now shows only one fully priced-in rate cut for 2025, with a 66% chance of a 25-basis-point cut by June, rising to 90% by September.

Betting markets add another layer of complexity. According to CFTC-regulated Kalshi, there's a 33% chance of a rate hike before the end of 2025. For every dollar wagered on this scenario, a bettor would earn $3 if Fed Chair Jerome Powell surprises markets with a hike before Jan. 1, 2026.

Uncertainty also clouds the outlook for cuts. Betting probabilities suggest a 23% chance of no cuts in 2025, a 22% likelihood of one cut, a 23% probability of two cuts and a 16% chance of three cuts.

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