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RATES MARKET & FED DIFFER ON LABOR SOFTNESS

ADMIN || 17th December 2025

Rates markets and the Federal Reserve are once again heading into the new year with fundamentally different interpretations of the labor landscape.

Today’s unusual two-month employment release points to a jobs market that is losing traction, with payrolls soft, unemployment drifting higher and wages decelerating. That combination has encouraged rates pricing to lean further into an extended easing cycle.

The SOFR term structure tells the same story: the Dec. 2025-Dec. 2026 spread is pricing about 61bps points of easing in 2026, a profile that stands in sharp contrast to the Fed’s one-cut outlook and underscores how far market expectations have drifted.

The FOMC’s latest statement highlights that divide. The insertion of language referring to the “extent and timing” of further easing appears to have slipped under the radar. It appeared in the December statement last year, just before the Fed entered a long pause. The central bank has stressed repeatedly that inflation must demonstrate firmer and more persistent improvement before it endorses the type of trajectory implied by market pricing.

This is the standoff. The market is comfortable extrapolating a softening labor market into a deeper cutting cycle. The Fed is notably split, but focused on inflation that remains above target, as evidenced by Atlanta Fed President Raphael Bostic’s comments on Tuesday.

If anything, Tuesday’s data deluge reinforces the asymmetry. The data were soft enough to validate near-term easing, but not soft enough to confirm the longer arc of cuts now priced for 2026. The result is a widening gap between what markets want the Fed to say and what officials are actually signaling.

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