Fed’s interest rate pause bolstered by jobs data, but concerns linger

By Ann Saphir

Feb 11 (Reuters) – Federal Reserve policymakers look likely to keep interest rates on hold for longer after data on Wednesday showed the U.S. job market began 2026 on better footing than expected, but revisions showing payroll growth all but stalled last year will keep alive concerns about a weakening labor market. 

The Bureau of Labor Statistics, in its shutdown-delayed report, said nonfarm payrolls rose by 130,000 jobs in January, compared with the gain of 70,000 economists in a Reuters poll had forecast. The unemployment rate ticked down to 4.3% from 4.4%.

Fed policymakers voted 10-2 last month to keep the central bank’s benchmark overnight interest rate in the 3.50%-3.75% range, after cutting it at each of the last three meetings of 2025. The bigger-than-expected job gain in January may give them some assurance that the labor market is stabilizing, and allow their attention to shift towards controlling inflation, which remains above the Fed’s 2% target.

“With the policy rate around neutral, January’s guidance pointing toward patience and the economy chugging along, an extended pause still seems likely,” Oren Klachkin, financial market economist at Nationwide, wrote in a note.  

Traders of interest-rate futures agreed. Though they are still betting the U.S. central bank will next reduce its policy rate at the June 16-17 meeting, they see almost a 40% chance it will not move then, versus about 25% before the jobs report.

The gain of 130,000 jobs in January “was good news,” said Kansas City Fed President Jeffrey Schmid, who noted his dissents on rate cuts at the end of last year were because he felt slow job growth was related more to shifting demographics and immigration policies rather than weak demand for workers.

JOB MARKET STALL, PRODUCTIVITY GAINS

Revisions to last year’s job-market figures, also published on Wednesday, put the estimated average monthly job growth in 2025 at about 15,000. That reading was an anemic pace more usual at the start of a recession than during a period of healthy economic growth.

From 2010 to 2019 the average monthly payroll gain was 183,000, more than all of last year’s increase. 

A sharp decline in immigration in President Donald Trump’s first year back in the White House was likely the biggest factor in last year’s job growth slowdown, because a shrinking labor force means the economy doesn’t need to create as many jobs for there to be enough to go around.

But it also has made reading the underlying state of the labor market difficult. Adding to a muddled employment picture is an apparent rise in productivity growth – whether from the adoption of artificial intelligence or simply because firms facing uncertainty on tariffs and other policies are working harder at making do with less labor.

U.S. GDP grew at an annualized pace of 4.4% in the third quarter, a pace that’s expected to ease somewhat this year but continue to exceed the sub-2% pace that Fed policymakers had thought was the economy’s healthy speed limit.

“In past cycles, GDP growth like this has usually required far more hiring,” Rick Rieder, BlackRock’s chief investment officer of global fixed income, wrote in a note. “The fact that hiring has slowed while growth has advanced may potentially be an early signal of a productivity boom that we expect to continue.”

Fed Governor Christopher Waller, one of the dissenters on the decision last month to hold rates steady, said on January 30 that he felt the labor market last year was far weaker than appreciated and showed it could weaken substantially from here. Though not quite the “Zero. Zip. Nada” job growth that Waller had thought the revisions would show, it adds to evidence of a frozen job market that at some point may crack.

“The low-hire/low-fire environment continues for now, and the declining unemployment rate is always a welcome sign,” Laura Ullrich, director of economic research in North America for the Indeed Hiring Lab, wrote in a note. “But this balance is precarious.”

(Reporting by Ann Saphir; Additional reporting by Howard Schneider and Lucia Mutikani; Editing by Andrew Heavens, Chizu Nomiyama and Paul Simao)