Nonfarm payrolls rose and unemployment dipped more than expected last month.
Markets are still expecting the Fed to cut rates in March 2024, fed fund futures show.
Fed policymakers convene next week and markets expect the central bank to hold steady.
The Labor Department reported Friday that nonfarm payrolls climbed by a seasonally adjusted 199,000 last month, higher than the 190,000 Dow Jones estimate, and above the October reading of 150,000.
Unemployment, meanwhile, dipped to 3.7%, below the forecasted 3.9%, and labor force participation moved up to 62.8%.
Market expectations shifted slightly after the data release, with CME's Fed Watch Tool showing a probability for an interest rate cut in March 2024 declined from about 55% to 47%.
One month ago, markets assigned a probability for a March cut at about 18%.
Though markets made a small downward adjustment to expectations for a cut in March, the Fed is likely still focused on inflation rather than jobs, and that data point is still moving in the right direction.
Neil Dutta of Renaissance Macro wrote in a note following the jobs report that US labor markets are "fine," and it isn't the primary driver for monetary policy right now.
"Indeed, there is an asymmetry in the Fed's policy reaction function: stronger employment will not push them away from a cut as much as weaker inflation will push them towards one," Dutta said. "The solid economy puts a ceiling on how many cuts we'll get, but it will not stop cuts altogether. That's what a recalibration of policy is about."
Ultimately, the vaunted "Goldilocks" outcome for the Fed to cool inflation and loosen the labor market without causing an economic contraction still appears on the table.
"This report should make you less anxious about a recession," said eToro US investment analyst, Callie Cox. "The job market is still in a good place, and wage growth is still coming down. That's what the Fed wants to see."
Earlier this week, the Job Openings and Labor Turnover survey from the Bureau of Labor Statistics pointed to a cooling US jobs market. Total job openings dipped to 8.7 million by the end of October, from a downwardly revised 9.4 million in September. That was below consensus forecasts and the lowest mark since the start of 2021.
Strategists at ING Economics, for their part, said at the end of November the Fed will cut interest rates six times next year as policymakers respond to a slowing economy.
Barclays, meanwhile, anticipates four rate cuts in 2024.
"We continue to believe the Fed's tightening cycle is complete," EY senior economist Lydia Boussour wrote in a note Friday. "Evidence of rapidly cooling inflation suggest the Fed is likely to remain on the sidelines at next week's policy meeting though the labor market endurance will lead Fed officials to retain some optionality for future rate hikes, if needed."
"We expect policymakers will resist talking about rate cuts until early 2024," she added. "Given our soft inflation outlook, we see the first 25bps rate cut in May with a total of 100bps of rate cuts next year."
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