Bond traders have virtually eliminated their expectations for Federal Reserve interest rate cuts this month after December's unemployment data showed a stronger-than-expected decline. The robust jobs report triggered a selloff in US Treasuries, pushing yields higher across all maturities by as much as three basis points on Friday.

Market Response to Employment Data

The jobs report provided the first comprehensive view of employment trends following significant disruptions to data collection. A six-week government shutdown from October 1 to November 12 had delayed the production of labor reports for September, October, and November, making December's data particularly significant for market participants.

Despite the immediate market reaction, bond traders have maintained their broader outlook for monetary policy easing. Market participants continue to expect two rate cuts overall in 2026, with the first anticipated by mid-year.

Fed Policy Outlook

"This keeps us on course for them to slowly continue cutting the fed funds rates as we go through this year," said Robert Tipp, chief investment strategist at PGIM Fixed Income. "They are on the cusp of, or in the top end of, the neutral range. So they may feel like they are not having an impact on the economy, they can stand to skip a meeting."

The Federal Reserve has lowered its target band for short-term lending rates at its past three meetings in response to weakening labor-market conditions. However, some officials remain concerned about inflation staying above their target, which could limit the pace of further easing.

Labor Market Focus

The case for additional Fed interest-rate cuts depends heavily on labor market performance in the coming months. John Briggs, head of US rates strategy at Natixis North America, emphasized this connection: "For us, the Fed will key off the unemployment rate more than the noise in the headline, so this in my view is slightly bearish for US rates."

Treasuries gained more than 6% last year, marking their best performance since 2020, as investors anticipated signs of a cooling job market. Following Friday's report, traders are now pricing the next reduction for June, the month after Fed Chair Jerome Powell's tenure ends, with another easing expected in the fourth quarter.

Tariff Considerations

Beyond employment data, traders remain alert to potential developments regarding President Trump's tariffs. A possible court ruling on the legality of these levies could impact Treasury markets. The tariffs have generated hundreds of billions of dollars in revenue and helped ease pressure on the US budget deficit.

JPMorgan Chase strategists, including Jay Barry, noted that removing tariffs would likely "rekindle fiscal concerns, presenting a risk of higher long-term yields and steeper curves." However, they expect any impact to be "fairly limited," given the administration's ability to pursue alternative routes to restore most levies.

The race to succeed Federal Reserve Chair Jerome Powell remains wide open, with US Treasury Secretary Scott Bessent confirming that four candidates are still in contention for one of the most consequential economic appointments. Speaking at an event hosted by the Economic Club of Minnesota in Minneapolis, Bessent provided insights into the selection process and timeline for the crucial decision.

Current Status of Candidates

The selection process has progressed significantly, with three of the four finalists having already met with President Trump for interviews. However, BlackRock's chief bond investment manager Rick Rieder has not yet been interviewed, according to Bessent's remarks.

Notably, Rieder stands out as the only candidate without prior Federal Reserve experience among the four finalists. When asked whether this lack of Fed experience was an advantage or drawback, Bessent diplomatically responded, "Well, the president will decide."

Expected Timeline for Decision

Bessent indicated that the nomination announcement could come around the time of the World Economic Forum in Davos, scheduled for January 19-23. The decision might be revealed either shortly before Trump departs for the meeting or soon after he returns. Bessent, along with Commerce Secretary Howard Lutnick and Energy Secretary Chris Wright, is among the senior administration officials expected to attend the Davos meeting.

Trump's Position on the Selection

President Trump has suggested that he has already made his decision internally. In an interview with the New York Times published on Thursday, Trump stated, "I have in my mind a decision," but declined to reveal the chosen candidate's name. "I haven't talked about it with anybody," he added during the Wednesday night interview.

When specifically asked about Kevin Hassett, Trump remained coy, saying "I don't want to say," but acknowledged that Hassett is "certainly one of the people that I like."

Significance of the Appointment

The Federal Reserve Chair position carries enormous influence over monetary policy and economic direction. Jerome Powell's term as Fed chair expires in May, making this appointment a critical early decision for the Trump administration. The selection will likely have far-reaching implications for interest rates, inflation policy, and overall economic strategy in the coming years.