EMPLOYMENT
The economy added 256,000 jobs in December, far outpacing expectations of a 165,000 increase. The unemployment rate fell from 4.2% to 4.1%. Average hourly earnings rose 0.3% for the month and are up 3.9% year-over-year. The labor force participation rate was steady at 62.5%. Interest rates rose in response to the strong report.
Our Take: A weaking employment picture was a big reason why the Fed felt comfortable to start their easing cycle. Recent reports and especially this one indicate that labor market weakening is diminishing as a concern, which should give the Fed ample cover to pause rate cuts until either inflation moves further toward its target or employment starts weakening again. Interest rates are now reflecting that the Fed may not have much further to go in this easing cycle.
FOMC MINUTES
This week the Fed released the minutes from the December FOMC (Federal Open Market Committee) meeting. The minutes show that “almost all participants” viewed that the upside risks to inflation had increased, citing “stronger than expected readings on inflation” and the “likely effects of potential changes in trade and immigration policy.” Many on the committee note the “disinflationary process may have stalled temporarily or note the risk that it could.” With a policy stance the Fed still considers meaningfully restrictive, the Fed is “at or near the point at which it would be appropriate to slow the pace of policy easing.”
Our Take: There was nothing surprising in the minutes. With a more stable labor market and inflation remaining stubbornly above target, the pace of future rate cuts remains unclear. Given the uncertainty, the Fed remains focused on a careful, data-driven approach to policy normalization.
MUNICIPALS
The start of 2025 marked the beginning of an income tax rate reduction in nine states. There are a few notable changes. Iowa’s income tax dropped from a top rate of 5.7% last year to a 3.8% flat tax for all taxpayers. Louisiana’s new flat tax of 3% replaces its graduated income tax brackets. Both North Carolina and Mississippi reduced their flat tax rate for 2025.
Our Take: States with lower income tax rates or a low flat tax may be attractive relocation destinations for taxpayers currently living in high-tax states which, along with increased investment, has the potential to drive economic growth. However, there is also the possibility that a cut in taxes can lead to lower revenue. The big question for states’ credit quality is whether increased growth can offset the lower rates.