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 also 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.

"The odds have increased that the Fed is close to being finished with its loosening cycle, particularly if the incoming Trump administration pushes ahead with a stagflationary mix of tariffs and immigration curbs," said Thomas Ryan, North America economist at Capital Economics.

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 positions added. The economy created 2.232 million jobs in the final year of President Joe Biden's term. About 3 million jobs were added in 2023.

Though hiring has slowed in the aftermath of the U.S. central bank's hefty rate hikes in 2022 and 2023, 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.

Job gains last month were concentrated in non-cyclical industries like healthcare, which added 46,000 positions that were spread across home healthcare services, nursing and residential care facilities as well as hospitals.

Retail employment rebounded by 43,000 jobs after declining 29,000 in November. Government payrolls rose further, adding 33,000 positions. Employment in leisure and hospitality increased by 43,000 jobs.

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 policy 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.

The dollar rose against a basket of currencies. Longer-dated U.S. Treasury yields jumped to their 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.

While business sentiment perked up following Trump's Nov. 5 election victory on hopes of tax cuts and a less-stringent regulatory environment, economists do not expect a surge in hiring in the near term. Business surveys likewise have shown no sign that companies are planning to boost headcount.

The fall in the unemployment rate was from 4.2% in November.

The government revised 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. The number of people who have permanently lost their jobs dropped 164,000 to 1.7 million last month.

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