U.S. January Non-Farm Payrolls Surpass Expectations; First Rate Cut of the Year May Happen Mid-Year

The U.S. Bureau of Labor Statistics released a report on Wednesday showing that in January, non-farm payrolls increased by 130,000, the largest gain since the second half of 2025 (all preliminary figures); at the same time, the unemployment rate decreased by 0.1 percentage points to 4.3%. Analysts noted that this report indicates the U.S. labor market is stabilizing, and it is expected that the Federal Reserve will continue to hold steady in the short term.

Bureau of Labor Statistics data show that in January, employment grew in healthcare, social assistance, and construction, while employment in the federal government and financial services declined. Specifically, healthcare added 82,000 jobs, social assistance increased by 42,000, and construction gained 33,000 jobs. Regarding wage growth, average hourly wages for private-sector non-farm employees rose by 15 cents in January to $37.17, a year-over-year increase of 3.7%.

Analysts stated that market expectations prior to this data were for January non-farm employment gains of 50,000 to 75,000. The actual figure significantly exceeded expectations, which may lead the Federal Reserve to delay further interest rate cuts. However, the downside risks to the U.S. labor market have not disappeared, and structural imbalances remain.

Fitch Ratings Chief Economist Brian Coulton told Jiemian News that the January employment report revealed two key pieces of information: first, recent employment growth has improved. Over the three months ending January 2026, the average monthly increase was 73,000 jobs. When considering factors that slow labor supply, this remains a quite robust level. “In fact, this is the largest three-month average increase since February 2025,” he said.

Second, the extent of labor market slowdown last year was greater than previously expected. Coulton pointed out that this report significantly revised down the employment data for 2025, with a total of 181,000 new jobs added, far below the initial estimate of 584,000, making it the weakest year for employment growth since the COVID-19 pandemic began. This leaves room for the Federal Reserve to adjust its policies moving forward.

Luzhe, Chief Economist at Dongwu Securities, told Jiemian News that the continued moderate unemployment rate reflects the resilience of the U.S. job market beyond expectations, supported by expansive fiscal and monetary policies as well as seasonal factors boosting the economy. Under these influences, U.S. economic performance in the first quarter is expected to remain better than anticipated.

Following the data release, U.S. stock index futures and Treasury yields both rose but then pulled back. Currently, the market expects the first rate cut of the year to occur as early as June or July. According to CME FedWatch, the probability of rate cuts in March and April is less than 25%, while in June and July it is around 45%.

“In the short term, market expectations for a Federal Reserve rate cut have noticeably cooled. Considering that most Fed officials and regional presidents are now ‘data-dependent,’ the unexpectedly strong January non-farm payrolls will likely delay rate cuts, especially reducing the chances of a cut in March and April,” Liu Tao, senior researcher at Guangkai’s Research Institute, told Jiemian News.

He further explained that the unexpected growth in non-farm employment in January is influenced by several seasonal and structural factors. First, seasonal adjustment models may underestimate the rebound in hiring at the start of the year. Typically, January sees some employment recovery driven by post-holiday return to work, temporary positions becoming permanent, and government projects starting. Particularly, early 2026 coincides with accelerated implementation of federal and state infrastructure and clean energy subsidy projects, boosting jobs in construction and related renewable energy industries. Second, the growth in non-farm employment shows clear industry differentiation, with sustained expansion in counter-cyclical sectors like healthcare and social assistance providing some support for employment.

However, Liu Tao cautioned that, due to recent cold waves in the U.S., data collection in some areas may have been affected, such as lower response rates in household surveys, though business surveys still showed strong growth, which could impact data accuracy. Combining these factors, he believes the sustainability of the above-expectation employment growth is uncertain.

“Temporary jobs in healthcare, construction, and a few other sectors contributed significantly to the increase, but manufacturing employment remained sluggish, failing to support this growth, highlighting an imbalance in employment structure. Additionally, trade tensions have driven up commodity prices, immigration policy tightening has reduced labor supply, and companies are increasingly replacing jobs with AI, further constraining employment expansion. Without broader industry recovery, future U.S. employment growth may be difficult to sustain,” Liu Tao said.

At the end of last month’s Federal Open Market Committee meeting, the Fed announced that the federal funds rate target range would remain at 3.50%-3.75%, marking the first pause in rate cuts since September-December last year, when the Fed cut rates three times consecutively. The post-meeting policy statement indicated that current indicators show economic activity is expanding steadily, employment growth remains slow, but some signs of stabilization in the unemployment rate are emerging, and inflation remains elevated. Going forward, the Committee will carefully assess the latest data, evolving economic outlook, and risk balance when considering further adjustments to the federal funds rate.

On January 30, U.S. President Donald Trump nominated former Fed Governor Kevin Warsh as the next Fed Chair. If approved by the Senate, Warsh will succeed Jerome Powell as the new head of the Federal Reserve by the end of May this year. Analysts expect that before the new chair takes office in June, the Fed is likely to remain on hold.