Job numbers, inflation leaving room for Fed to hold rates

Slowing but healthy US job growth, combined with rising inflation expectations, supports the Federal Reserve’s inclination to keep interest rates on hold for the foreseeable future.

Nonfarm payrolls moderated last month, unemployment fell, and annual government revisions now show job gains were softer but still solid in 2024, according to a Bureau of Labor Statistics report out Friday. Separate data from the University of Michigan showed consumers expect prices to rise much faster in the year ahead as President Donald Trump pushes forward with tariffs.

The reports illustrate a moderating yet still-strong labor market that continues to fuel the economy, while proposed policies from the Trump administration risk reigniting inflationary pressures. That helps explain why Fed officials have signaled they aren’t in a hurry to lower borrowing costs further after a full percentage point of interest-rate cuts last year. 

“The way the Fed has characterized the labor market is that it’s largely stable and healthy. And I think that the payroll numbers certainly point in that direction,” said Stephen Stanley, chief US economist for Santander US Capital Markets LLC. “This is certainly not going to give them reason to think about further rate cuts in the short term.”

Payrolls increased by 143,000 last month after upward revisions to the prior two months, according to BLS. Other revisions only carried out once a year weren’t as severe as once thought — job gains averaged 166,000 a month last year, a slowdown from the initially reported 186,000 pace.

The unemployment rate came in at 4.0 percent. While not directly comparable to prior months because of population adjustments, BLS said excluding those effects, the rate fell from December.

The S&P 500 reversed gains and Treasury yields marched higher after the University of Michigan preliminary data. The heightened near-term inflation expectations drove down consumer sentiment to a seven-month low in early February, and the decline occurred across all political affiliations.

Stocks dropped further and the dollar strengthened after a report that Trump told Republicans he plans to issue reciprocal tariffs as early as Friday.

Job growth in January was largely fueled by health care, retail trade, and government. Employment fell in mining, quarrying, and oil and gas extraction, as well as temporary help services and auto manufacturing.

The BLS said the wildfires in Los Angeles, as well as severe winter weather in other parts of the country, had “no discernible effect” on employment in the month. Even so, nearly 600,000 people didn’t work in January because of bad weather — the most in four years. Another 1.2 million people who usually work full-time could only find part-time work due to the weather.

That also had an effect on hours worked, which dropped to the lowest since the onset of the pandemic. Meantime, hourly wages climbed 0.5 percent from December and 4.1 percent from a year ago.

The jobs report is comprised of two surveys, one of businesses — which produces the payrolls figures — and another of households, which is the source of the unemployment rate. 

Friday’s release included an annual update to the employer survey, which showed job growth was 589,000 lower in the 12 months through the March 2024 than initially reported. That compared to the BLS’s preliminary estimate of a markdown of 818,000, which would have been the most since 2009.

The BLS uses records from the unemployment insurance tax system, and also adjusts for the openings and closings of businesses, to revise its previously published payrolls counts.

The household survey reflected new population estimates from the Census Bureau, which drove up the number of employed people in the labor force. A sizable portion of that reflected foreign-born workers, suggesting immigration continued to be a key driver of job growth.

The participation rate — the share of the population that is working or looking for work — was 62.6 percent in January, which also incorporated the updated population estimates. The rate for workers ages 25-54, was 83.5 percent.