Mixed Jobs Report Unlikely to Move Mortgage Rates Further

• The good news in this report was that we appear to still be in a low fire environment. The unemployment rate fell from 4.56% to 4.38% while forecasters expected it to land in the 4.5% range. Some of the larger decline is due to people no longer looking for jobs (and therefore not being counted in the unemployment rate), but much of it was because employment increased in the survey that measures the unemployment rate.
• The not so good news is that we’re also still in a low hire environment. The separate survey measuring job creation showed that only 50,000 jobs were added in December, less than the 70,000 expected by forecasters and an average pace of about 100,000 per month at the beginning of 2025. Much of the slowdown can be ascribed to lower labor supply with net immigration falling dramatically over the course of the year, but some is likely due to employers demanding fewer employees. Almost all of the job creation currently is in health care services.
• October’s data has been updated to now show 173,000 fewer jobs, but that was entirely due to federal government workers who had accepted the deferred resignation program offered by DOGE earlier in the year officially coming off of payrolls, not a reflection of the strength of the labor market.

• The Fed Funds rate is currently at 3.75%, down from 5.5% at its peak a couple of years ago. That is close enough to neutral–where the Fed wants to be if they’re neither pumping the gas nor the brakes–that there is not much room to cut without substantial evidence of recession risk.
• In addition, lingering inflation risk remains as inflation is still above the Fed’s target. This worry is compounded by the recent statistical problems in the CPI data post-government shutdown. The BLS now acknowledges that “[i]n periods of general price increases, the carry-forward method may result in an underestimation.” In plain English, when prices are generally going up, the BLS’s assumption that a substantial portion of prices, especially rents, did not go up will result in inflation reports that are too low. This distortion will remain until April 2026.
• Finally, the economy will likely see a boost this year from the tax cuts passed last year, further limiting the Fed’s desire to cut rates.

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