Strong monthly jobs growth and easing unemployment have pushed back expectations about when the Federal Reserve will lower interest rates again, suggesting the central bank is poised for an extended pause.
Data released on Wednesday by the Bureau of Labor Statistics showed monthly jobs growth of 130,000 positions, almost double what economists had forecast, and the unemployment rate ticking down to 4.3 percent. That is down from a recent peak of 4.5 percent in January and slightly lower than December’s level.
The unemployment rate has become a focal point for the Fed as it assesses the health of the labor market in the wake of immigration restrictions imposed by President Trump. The crackdown, which has led to a sharp slowdown of migration into the country, has decreased the supply of new workers available for hire. The number of new jobs the economy needs to keep the unemployment rate stable has dropped as a result, with research suggesting it could turn negative by this year. In 2024, the so-called monthly break-even rate was estimated to be well above 100,000 positions.
Financial markets shifted sharply on Wednesday after the jobs report was released, with traders pushing back the timing of the next cut to July from June.
“The window to see a material weakening in the labor market is probably closing,” said Stephen Juneau, an economist at Bank of America. “It seems like we have more momentum building in the economy rather than the reverse of that.”
The Fed is trying to safeguard the labor market while also ensuring that rates are high enough for inflation to fall back to the central bank’s target of 2 percent. Price pressures have mounted as Mr. Trump’s tariffs have taken effect, although the overall impact has been more muted than initially expected. Officials at the Fed broadly expect the peak impact from those levies to hit in the first quarter of this year before inflation begins to decelerate again.
January’s Consumer Price Index report, set to be released on Friday, will give policymakers insight into whether that forecast is bearing out. Economists expect annual inflation to tick down to 2.5 percent after a 0.3 percent increase in monthly prices. “Core” inflation, which strips out volatile food and energy items, is expected to stay sticky at 2.5 percent, only slightly lower than the previous 2.6 percent annual pace.
But in a sign that labor-related price pressures remain muted, the employment cost index, a quarterly measure from the Labor Department that tracks changes in wages and benefits, unexpectedly slowed in the final three months of 2025.
Economists at Evercore ISI said that data, which came out on Tuesday, confirmed their view that the “economy is cooling under the hood, even though we face up to another six months of elevated tariff pass-through.”
Beyond the impact of tariffs, the Fed is also contending with the prospects of stronger growth in the coming quarters as Americans receive larger refunds as a result of Mr. Trump’s new tax cuts. The ongoing boom in artificial intelligence investments is also expected to fuel economic growth. Bank of America’s Mr. Juneau described the tax refunds as a “jolt for consumption over the next few months.” He said that, coupled with a likely easing of trade uncertainty ahead of the midterms, could imbue companies with the confidence to hire and invest more in the economy.
“This year, with the midterms, you’re not going to see tariffs really ratcheted up again,” he said.
At the Fed’s meeting just last month, Jerome H. Powell, the chair, struck a more upbeat tone about the economic outlook. He described the labor market as “stabilizing” after a period of weakness last year and noted that consumer spending and business fixed investment remained strong, even as Americans had grown less confident about the economy.
“The economy has once again surprised us with its strength, not for the first time,” Mr. Powell said.
That shift helped to justify the central bank’s decision at that meeting to pause rate cuts after a series of reductions last year. Between September and December, the Fed lowered rates by an aggregate three-quarters of a percentage point to a range of 3.5 percent to 3.75 percent.
By the December meeting, the Fed’s policy decisions had become increasingly fraught, reflecting a fissure between policymakers over how to weigh concerns about the labor market versus inflation. Those divisions have lessened, but even January’s vote to hold rates steady was not unanimous.
Stephen I. Miran, who has dissented at every meeting since he joined the Fed in September, voted in favor of a quarter-point cut. He was joined by Christopher J. Waller, a governor who was a finalist to replace Mr. Powell as chair when his term is up in May. A few days after that meeting, Mr. Trump tapped Kevin M. Warsh, a former Fed governor, for the job.
In explaining his dissent, Mr. Waller said that revisions to the jobs data would likely show no growth in employment last year.
“Zero. Zip. Nada,” Mr. Waller said in a statement. “This does not remotely look like a healthy labor market.”
Further cuts appear to hinge on the labor market breaking out of its current “low hire, low fire” state and layoffs beginning to pickup in a more broad-based way, or inflation significantly slowing. Mr. Powell last month stopped short of signaling any timeline for future moves, reiterating that the central bank is “well positioned” for the moment and to address any economic challenges. He did, however, downplay the possibility of a rate increase this year.
“We don’t take things off the table, but it isn’t anybody’s base case right now,” Mr. Powell said.
Traders still expect rates to fall toward 3 percent by year-end, but to get there more slowly than before. Many officials believe that 3 percent rates would shift policy to a “neutral” setting that neither stimulates nor restricts growth. Mr. Trump, who said his support of Mr. Warsh was contingent on his pushing for lower borrowing costs, has argued for rates to be closer to 1 percent.
In a social media post on Wednesday after January’s report was released, the president again called for the country to be paying the lowest interest rate in the world and said it would lead to cost savings of at least $1 trillion a year related to payments to service the national debt.
But the Fed does not take into consideration interest payments on the debt when setting policy. It is congressionally mandated to pursue low, stable inflation and a healthy labor market.
“If you’re somewhat in the neutral camp and inflation is above target, then it’s harder for them to make the case to cut,” Priya Misra, a portfolio manager at J.P. Morgan Asset Management, said of the Fed. “They need a clear emergency message from the labor market.”
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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