A surprisingly weak jobs report for February has cast doubt on the idea that the labor market is stabilizing. However, it probably won’t be enough to convince the Federal Reserve to cut interest rates this month, as a recent oil price shock stemming from conflict in Iran introduces a new risk of higher inflation.
“This jobs report has got my attention,” said one regional Fed president. “The labor markets may be a little weaker than we have seen so far.” She added that the central bank is now facing “two-sided risks,” noting that “the oil price shock, depending on how long it lasts, is a real thing.”
The latest government data showed the economy unexpectedly lost 92,000 jobs last month, pushing the unemployment rate up to 4.4% from 4.3% in January. A major factor in the decline was a strike among healthcare workers, which contributed to 30,000 job losses that are likely to be temporary. Winter storms also negatively impacted the numbers.
Even accounting for those temporary factors, the underlying trend appears to be slowing. Employment figures for the previous two months were revised downward, and job gains in other sectors weren’t strong enough to offset the losses in healthcare. An investment strategist noted that while certain events may have distorted February’s data, the pace of job creation has slowed dramatically compared to the previous year, making it harder for the Fed to justify a patient approach to further rate cuts.
Other Fed officials echoed the theme of balancing risks. One pointed out the need to weigh a softening job market against what she sees as “broad-based inflationary pressures.” Given this combination and the rate cuts enacted last fall, she believes current policy is in a “good position.” Under her base case, the Fed could hold rates steady for “quite some time” to await clearer evidence that inflation is subsiding.
Another official suggested that while the hiring rate has been low, a sharp decline in immigration means the economy now needs a slower pace of job creation to keep unemployment stable. With the unemployment rate still low by historical standards, she sees no “urgency for additional policy adjustments” right now and expects to hold rates steady for “some time.”
However, not all officials agreed. One Fed governor argued that the weak jobs report actually strengthens the case for rate cuts, stating he doesn’t believe there is an inflation problem. “I think that the labor market can use more accommodation from monetary policy,” he said, advocating for a policy stance closer to “neutral,” which is designed to neither spur nor slow economic growth. He estimates the neutral rate is a full percentage point below the current level.
