By Lucia Mutikani

WASHINGTON (Reuters) -U.S. job growth unexpectedly accelerated in December while the unemployment rate fell to 4.1% as the labor market ended the year on a solid footing, reinforcing views that the Federal Reserve would keep interest rates unchanged this month.

The Labor Department’s closely watched employment report on Friday also showed a decline last month in the number of people who have permanently lost their jobs and a shortening in the median duration of unemployment. A rise in these measures had raised concerns about labor market deterioration.

The upbeat report supported the U.S. central bank’s cautious stance toward further monetary policy easing this year amid mounting fears that pledges by President-elect Donald Trump to impose or massively raise tariffs on imports and deport millions of undocumented immigrants could stoke inflation.

Those worries were evident in minutes of the Fed’s Dec. 17-18 policy meeting published on Wednesday, which noted “most participants remarked that … the Committee could take a careful approach in considering” further cuts. Economists do not expect rate cuts in the first half of this year.

“The report was a master class of labor market resilience,” said Scott Anderson, chief U.S. economist at BMO Capital Markets. “The solid nonfarm payroll gain and decent earnings growth will keep the U.S. economic expansion on a sturdy foundation to start the year and that will likely keep the Fed on the sidelines at the January meeting.”

Nonfarm payrolls increased by 256,000 jobs last month, the most since March, the Labor Department’s Bureau of Labor Statistics said. Data for October and November was revised to show 8,000 fewer jobs added than previously reported.

Economists polled by Reuters had forecast payrolls advancing by 160,000 jobs, with estimates ranging from 120,000 to 200,000. The economy created 2.23 million jobs in the final year of President Joe Biden’s term, equating to an average of 186,000 jobs per month. Though below the 3 million jobs added in 2023, employment gains were in line with the pace seen in 2018.

Hiring has slowed in the aftermath of the U.S. central bank’s hefty rate hikes in 2022 and 2023, but labor market resilience, mostly reflecting historically low layoffs, is powering the economy by supporting consumer spending via higher wages. The economy is expanding at well above the 1.8% pace that Fed officials regard as the non-inflationary growth rate.

“The handoff between presidents has never been this solid,” said Christopher Rupkey, chief economist at FWDBONDS. “The American economy is not just great again, activity is booming.” 

Job growth last month extended beyond the non-cyclical industries, with even retail payrolls rebounding, though hiring was partially boosted by a late Thanksgiving holiday.

Healthcare employment increased by 46,000 positions, spread across home healthcare services, nursing and residential care facilities as well as hospitals.

Retail employment surged by 43,000 jobs after declining 29,000 in November. It was lifted by hiring at clothing and general merchandise retailers. Professional and business services payrolls rose by 28,000. Government employment rose by 33,000 positions.

Leisure and hospitality employment increased by 43,000 jobs, with 29,800 of the positions at restaurants and bars. Hiring also rose in the social assistance, information, construction, finance and insurance as well as transportation and warehousing industries.

But manufacturing shed 13,000 jobs, most of them in semiconductor and other electronic component manufacturing. Jobs were also lost in the mining and logging industry.

JANUARY RATE CUT PAUSE

Financial markets overwhelmingly expect the Fed to keep its benchmark overnight interest rate unchanged in the 4.25%-4.50% range at its Jan. 28-29 meeting, CME’s FedWatch tool showed. The central bank has lowered its policy rate by 100 basis points since launching its easing cycle in September.

The Fed last month projected only two quarter-point rate cuts this year compared to the four it had forecast in September, acknowledging the economy’s endurance and still-elevated inflation. The policy rate was hiked by 5.25 percentage points in 2022 and 2023.

“It would take a very bad set of jobs reports to get the Fed easing again by March, and, so, we now see the next cut in June followed by a final one in September,” said Michael Feroli, chief U.S. economist at JPMorgan.

Stocks on Wall Street fell. The dollar rallied against a basket of currencies. Yields on longer-dated U.S. Treasury securities jumped to the highest levels since November 2023.

Average hourly earnings increased 0.3% last month after gaining 0.4% in November. In the 12 months through December, wages advanced 3.9% after rising 4.0% in November. The average workweek was unchanged at 34.3 hours. Aggregate earnings gained 0.4%. Labor income rose at a seasonally adjusted annualized 5.9% in the fourth quarter, the most since the third quarter of 2023.

“This should continue to support consumption as nominal labor market income growth is solidly outpacing inflation,” said Michael Gapen, chief U.S. economist at Morgan Stanley.

The fall in the unemployment rate was from 4.2% in November. The jobless rate averaged 4.0% last year compared to 3.6% in 2023. In the report on Friday, the government also released revisions to the seasonally adjusted household survey data, from which the unemployment rate is derived, for the last five years.

There was minimal impact on the jobless rate, though the jump to 4.3% in July, which spurred an unusually large rate cut from the Fed in September, was revised down to 4.2%.

Household employment increased by 478,000 jobs in December. It had lagged payroll employment, leading some economists to proclaim that labor market strength was being overstated. Household employment is, however, a very volatile measure.

Though 243,000 people entered the workforce, the labor force participation rate held steady at 62.5% for the third straight month. But the employment-to-population ratio, a measure of an economy’s ability to create employment, rose to 60.0% from 59.8% in November. The number of people who have permanently lost their jobs dropped 164,000 to 1.7 million.

The median duration of unemployment decreased to 10.4 weeks. It had steadily risen since September, hitting a near three-year high of 10.5 weeks in November.

“The labor market is in good shape and appears to be tightening,” said Conrad DeQuadros, senior economic advisor at Brean Capital.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)

---