After the December US unemployment rate data was released, market expectations for the Federal Reserve's recent rate cuts were immediately reset to zero.

Bond traders' reactions were the most direct—they have essentially ruled out the possibility of the Fed cutting rates in January. US short-term government bonds experienced a massive sell-off, with the two-year Treasury yield rising nearly 5 basis points to hit a new high for the year. What does this reflect? It indicates that market expectations for the Fed's policy path are rapidly adjusting.

Suvadra Rajapakse, Head of US Interest Rate Strategy at Société Générale, straightforwardly stated that the decline in the December unemployment rate and the rise in wage levels are strong enough signals to fully support the Fed holding steady in January. Tim Moshay, Head of Fixed Income at Canadian Imperial Bank of Commerce, is even more decisive: he has long believed that a rate cut in January is unlikely, and now that possibility has been completely ruled out. The Fed is most likely to cut rates, but this step will not happen before the first quarter at the earliest.

Interestingly, the Fed places much more emphasis on the unemployment rate data than on the surface fluctuations of non-farm payrolls. From a strategic perspective, a decline in the unemployment rate actually sends a mildly negative signal to the Fed—after all, it means the labor market is tighter, and inflationary pressures still exist.

What about 2026? Traders still maintain expectations of two rate cuts throughout 2026, with the first cut expected to occur mid-year. In other words, the actual rate-cut cycle is not in sight but further down the road. For investors focused on the macro environment, this signal is very clear: the Fed will keep interest rates high in the short term until inflation data further confirms moderation, and the labor market cools more, before considering the next round of rate cuts.