Fed Expected to Pause Rate Cuts as Non-Farm Payroll Data Disappoints

Huatai Securities released a research note on January 10th outlining expectations for Federal Reserve policy through mid-2026, with the recent non-farm payroll report serving as a key catalyst for the analysis. The latest employment figures have prompted economists to reassess the Fed’s rate-cut timeline in coming months.

December Non-Farm Payroll Report Misses Market Expectations

The December non-farm payroll additions came in at 50,000, significantly underperforming Bloomberg’s consensus estimate of 70,000 jobs. This disappointment extends beyond a single month—employment data from October and November were also revised downward by a combined 76,000 jobs, bringing troubling news about labor market momentum.

The soft non-farm payroll reading has sparked concerns about employment durability. While the unemployment rate did tick down slightly, the substantial downward adjustments to prior months paint a different picture. The three-month average for private sector non-farm payrolls has now fallen to just 29,000—a troubling low that signals potential weakness ahead. More concerning is the employment distribution: the diffusion index for non-farm payroll hiring contracted in December compared to November, suggesting job gains have become more concentrated across fewer industries rather than broadly distributed.

Why Markets Shouldn’t Dismiss the Positive Signals

Despite the weak non-farm payroll headline, other labor market indicators suggest the employment picture isn’t deteriorating further. Initial jobless claims have been beating expectations consistently, and layoff trends remain favorable. The NFIB (National Federation of Independent Business Index), a leading employment gauge, continues its gradual improvement trajectory.

Huatai Securities’ analysis emphasizes the critical “gap” between U.S. economic growth and employment momentum—what economists call the “temperature difference.” This mismatch matters for Federal Reserve decision-making because weaker non-farm payroll growth could pressure the Fed toward rate cuts if recession risks emerge, but stronger economic data gives the central bank room to hold rates steady.

The Fed’s Likely Rate-Cut Pause and 2026 Outlook

The report’s base case expects the Federal Reserve to announce a rate-cut pause at its January meeting, with rates held steady through May 2026. The emphasis will be on observing incoming economic data—particularly non-farm payroll trends—before committing to additional easing. Only after the new Federal Reserve chairman assumes office does the report expect 1-2 additional rate cuts to materialize later in the year.

This cautious stance reflects uncertainty around the non-farm payroll trajectory. If employment data stabilizes and non-farm payroll gains rebound as expected, the Fed’s patient approach through spring will likely hold. The central bank’s decision-making will hinge on whether the gap between strong GDP growth and weaker non-farm payroll growth continues to widen in coming months.