January NFP Preview: A Key Test for Fed Policy
Article published on February 6th, 2025 8:59AM UK Time
The January Non-Farm Payrolls (NFP) report will be closely watched for signs of a gradually cooling labour marketor continued resilience. While December’s data surprised to the upside, broader trends suggest job growth is slowing, and upcoming benchmark revisions could further adjust past employment figures downward.
Each January, the Bureau of Labor Statistics (BLS) implements its annual benchmark revisions, which incorporate more accurate employment records from the Quarterly Census of Employment and Wages (QECW). This process often adjusts past payroll figures, correcting for potential distortions in the original survey data. Preliminary estimates suggest that payroll gains from last year may have been overstated, indicating a sharper slowdown in job creation than previously thought.
If the revised data confirms a lower trajectory for employment growth, it could reinforce the view that the labour market is cooling more rapidly than headline figures have suggested. Such an outcome might weigh on market expectations for future Federal Reserve policy decisions, particularly regarding the timing of potential rate cuts.
Fed Chair Powell has maintained that the labour market is balanced, with job creation at levels that keep unemployment stable. However, if revised data confirms weaker employment growth, it could reinforce expectations for rate cuts. Meanwhile, wage growth remains critical—if it moderates, it supports a dovish Fed outlook, but if it stays firm, rate cuts may be delayed.
Beyond headline job creation, wage growth will be a key factor in determining the overall strength of the labour market. Wage pressures have been a significant consideration for the Fed, as persistent earnings growth could fuel inflation concerns and delay policy easing.
Markets will be closely monitoring whether wage gains remain stable or show signs of slowing. If wage growth moderates, it would signal a further easing of inflationary pressures, reinforcing expectations for Fed rate cuts later in the year. However, if wage growth remains strong, it could complicate the Fed’s decision-making process and push back the timing of policy easing.
Market Implications:
- Soft NFP & slowing wages: Strengthens case for earlier Fed cuts, pushing yields lower, USD weaker, and stocks higher.
- Strong NFP & firm wages: Markets may reprice rate cut expectations, leading to higher yields, a stronger dollar, and risk-off sentiment. (Though note that the US administration is targeting lower US10Y yields)
- Revisions Matter: Lower past payrolls would confirm a sharper labour market slowdown, reinforcing the case for policy easing.
This NFP release is not just about the headline number—it will shape expectations for the Fed’s policy trajectory in 2024.