U.S. hiring cooled in December to the lowest pace in two years, but the labor market remained resilient in the face of higher interest rates, scorching-hot inflation and mounting recession fears.

Employers added 223,000 jobs in December, the Labor Department said in its monthly payroll report released Friday, topping the 200,000 jobs forecast by Refinitiv economists. Still, it marks a slight deceleration from the downwardly revised gain of 256,000 in November and is the worst month for job creation since December 2020. The unemployment rate unexpectedly fell to 3.5%, a five-decade low.

"No doubt the labor market has been able to withstand prolonged rate hikes better than many expected," said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. "Remember though that monetary policy acts on a lag, so it’s likely an if and not a when for a slowdown in hiring. The Fed minutes made it clear that rates will remain high for all of 2023, so investors should prepare for a bumpy ride."

Wage growth also cooled in December, with average hourly earnings rising just 0.3% from a month earlier and 4.6% from the previous year. That is likely a reassuring sign for the Federal Reserve as it tries to wrestle stubbornly high inflation under control with the most aggressive rate-hike campaign since the 1980s. Policymakers see wages as a pivotal indicator of inflationary pressures in the economy.