"Non-farm does not cool down" suppresses rate cut expectations; the market re-evaluates the Federal Reserve's policy path

The latest U.S. employment data for January unexpectedly showed strong gains, significantly dampening market expectations of an interest rate cut by the Federal Reserve before mid-year. As the labor market continues to stabilize, concerns over a persistent rise in the unemployment rate are easing, and related risk scenarios no longer seem as urgent.

Data shows that in January, the U.S. added 130,000 jobs, and the unemployment rate fell to 4.3%. This set of data, released by the U.S. Bureau of Labor Statistics on Wednesday, alleviates market fears of worsening employment. These concerns previously prompted the Fed to cut interest rates three times consecutively by the end of 2025 and to hold steady in January of this year.

At the policy meeting last month, Fed officials mentioned signs of stabilization in the labor market as a reason to keep rates unchanged. Following the latest employment report, traders quickly reduced the probability of a rate cut at the June meeting, which was previously viewed as the most likely time for the next cut; now, the probability has fallen below 50%.

According to Jucheng Finance APP, former Senior Advisor at the San Francisco Fed Tim Mahedy said, “This undoubtedly complicates the case for a rate cut; January’s data was indeed very strong.”

However, economists also caution that the impressive January figures could still be revised downward, and job growth remains concentrated in a few sectors, mainly healthcare. Revisions to last year’s data show that the average monthly job gains in 2022 were only 15,000, far below the initially reported 49,000. Nonetheless, Stephen Stanley, Chief U.S. Economist at Santander US Capital Markets, pointed out that the January rebound is enough to ease market concerns that the unemployment rate will continue to rise amid AI shocks and corporate hiring hesitation.

Stanley stated, “The health of the January data essentially puts an end to the narrative that the labor market is about to collapse, which is exactly the scenario some dovish Fed members have frequently mentioned.”

Meanwhile, policy stance disagreements continue to simmer. Kansas City Fed President Esther George said on Wednesday that the central bank still needs to keep rates at restrictive levels to continue exerting downward pressure on inflation, and she noted that “there have not been many signs of tightening from the economic data.”

On the other hand, Trump continues to call for rate cuts. After the employment data was released, he praised the “excellent employment figures” on social media and said the U.S. should enjoy the lowest interest rates globally. Kevin Hassett, head of the White House Council of Economic Advisers, also told the media that the Fed “still has ample room to cut rates,” arguing that supply shocks from AI will boost economic growth without pushing up inflation. Kevin Waugh, a nominee to succeed Powell as Fed Chair, also shares a similar view.

Research indicates that the January non-farm payroll report lessened the urgency for the Fed to cut rates quickly, but if inflation continues to decline in the coming months, policy space remains. The institution expects the Fed to potentially cut a total of 100 basis points this year.

However, several observers emphasize that it is premature to determine the policy direction for June. Stephanie Roth, Chief Economist at Wolfe Research, said that current key indicators show the labor market and overall economy are strengthening, which does not fully align with Waugh’s advocacy for rapid rate cuts. “This indeed makes his task a bit more difficult.”