This Friday's Non-Farm Payrolls report has become the critical variable determining the Federal Reserve's short-term policy trajectory. According to the latest report released Monday by Citigroup's Andrew Hollenhorst team, if the December U.S. unemployment rate rises to 4.7% as expected, the Fed is highly likely to cut its policy rate by another 25 basis points this month.

Although Fed officials have recently signaled they are "in no hurry" for further rate cuts, persistent weakness in the labor market is altering this expectation. Citigroup believes that following the softness revealed in November's data, further loosening in the labor market will compel policymakers to reassess their stance. Should the unemployment rate continue its upward trend, implementing rate cuts to support the economy will become an inevitable choice.

The market is currently pricing in only 60 basis points of rate cuts for the entirety of 2026, which may underestimate the potential for policy easing. Analysts suggest that, balancing the risks of a weakening labor market and cooling inflation, the baseline forecast for actual rate cuts this year is 75 basis points, with the possibility of exceeding 100 basis points not ruled out.

As Friday's data release approaches, investors need to closely monitor specific signs of labor market cooling, which will directly determine whether the Fed will continue the rate-cutting pace initiated in 2024.

The upcoming December employment report follows data from November that already indicated ongoing labor market loosening. Citigroup's base case assumption is for the unemployment rate to climb to 4.7%, continuing the prior upward trend, which would be a key variable for maintaining the Fed's rate-cutting path.

Regarding the non-farm payrolls figure, Citigroup expects an increase of 75,000 jobs. Analysts specifically noted that Fed Chair Powell previously explained that, considering downward revisions of around 60,000, this level of growth effectively suggests job growth is nearing a standstill. Furthermore, Indeed's job postings index shows an overall downward trend, and while initial jobless claims are volatile, they remain at low levels overall; these indicators collectively paint a picture of a cooling job market.

Reviewing the policy path, the Fed cut rates by 100 basis points in 2024, then paused, followed by a 75 basis point cut in 2025. Currently, although officials reiterate there is no urgency for further cuts, Powell has characterized the current policy rate as being at the "upper end of the neutral range," hinting at room for further reduction.

The report argues that, based on experience from the past two years, the Fed will resume cutting rates once the labor market shows clear, further weakening. While the meeting-by-meeting decision-making model makes the precise path highly data-dependent and unpredictable, the overall trend points toward easing. Looking beyond monthly data fluctuations, the unemployment rate has shown an upward trend over the past two years, coupled with cooling services inflation (particularly in housing), providing a macroeconomic foundation for rate cuts.

Beyond employment data, other macroeconomic indicators also support a dovish stance. Oil prices are primarily holding below $65 per barrel, helping to alleviate inflationary pressures. Simultaneously, although the December ISM Manufacturing Index might show slight improvement, it is still expected to remain in contraction territory.

Citigroup analysts point out that the overall risk balance for 2026 leans toward labor market weakness and further disinflation. Compared to market pricing expectations of only 50 basis points of cuts or less, the scenario where the Fed ultimately implements more than 60 basis points of easing is significantly more likely. If the unemployment rate data confirms the judgment of market loosening, the yield curve could steepen further.