The US unemployment rate dropped significantly in December, prompting investors to increase their bets on the Federal Reserve moving quickly to raise interest rates and withdraw the stimulus it put in place to support the economy at the start of the pandemic.

Economists and investors expect the central bank to press ahead with plans to tighten monetary policy despite unexpectedly slow jobs growth in December, when employers added 199,000 jobs, a decline from 249,000 in November. The headline figure was well short of the 444,000 expected by economists.

However, the unemployment rate fell by another 0.3 per cent last month to 3.9 per cent, putting it within touching distance of the pre-pandemic normal of 3.5 per cent.

Declining unemployment chimed with other strong data in the jobs report, including better than expected average hourly earnings, giving the Fed leeway to embark on the withdrawal of the unprecedented stimulus it deployed at the start of the pandemic to stave off economic collapse.

“The Fed has decided to put more emphasis on the unemployment rate over the payroll number,” said Brian Rose, senior economist at UBS. “The fact that the unemployment rate is all the way down to 3.9 per cent is really critical for the Fed.”

The figures added fuel to a sell-off in the Treasury market as traders became more confident in their view that the Fed will raise rates this quarter. Yields on the benchmark 10-year US government note rose 0.06 percentage points to 1.78 per cent, its highest level since January 2020. Yields rise when bond prices fall.

The 10-year yield has posted its biggest weekly rise in 28 months over the past five trading days. The bond sell-off has buffeted Treasuries across the yield curve, with yields on the five-year note climbing to 1.51 per cent, the highest since January 2020.

US stocks also sold off, with investors dumping fast-growing technology companies that are viewed as most vulnerable to rising rates. The technology-heavy Nasdaq Composite slid 1.1 per cent, while the benchmark S&P 500 fell 0.5 per cent.

President Joe Biden focused on the drop in the unemployment rate and wage gains rather than the slowdown in the pace of hiring as evidence of his administration’s successful policies, including trillions of dollars of stimulus and infrastructure spending.

“I would argue the Biden economic plan is working and it’s getting America back to work, back on its feet,” he said in remarks from the White House on Friday.

The data released by the Bureau of Labor Statistics on Friday showed another marginal improvement in the share of people employed or looking for a job.

Concerns about Covid and childcare issues are chiefly to blame for holding back a more substantial return to work, keeping the so-called labour force participation rate below where economists anticipated it would be at this stage of the recovery.

It inched higher to 61.9 per cent in December, up from 61.8 per cent in November but still more than 1 percentage point shy of the pre-pandemic threshold.

Average hourly earnings growth increased 0.6 per cent from the previous month, for an annual gain of 4.7 per cent.

The Fed is under pressure to tame soaring inflation, which now hovers at the highest level in roughly 40 years. Jay Powell, the Fed chair, recently said the central bank was watching wage growth closely for further evidence that inflation could morph into a more persistent problem.

Christopher Waller, a Fed governor, and James Bullard, president of the St Louis Fed, are among those who support a rate rise in March, with additional increases later in the year. Most Fed officials see three rate rises in 2022 and another five by the end of 2024.

Biden on Friday signalled that he wants the Fed to stamp out inflation, saying he was confident the central bank would “make sure the price increases do not become entrenched over the long term”.

Additional reporting by Christine Zhang and James Politi



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