No clear signal for Fed as unemployment rate drops to 4%

Employers added fewer workers than expected in January, but the unemployment rate ticked down slightly thanks to upward revisions of previous months’ estimates, according to the latest government employment survey.

Employment increased by 143,000 jobs in January, according to a report from the Bureau of Labor Statistics released Friday morning. The increase fell short of market forecasts, which projected an uptick of 169,000, according to the Dow Jones consensus.

But the report also revised job gains from the prior two months upward by nearly 50,000 for each of those months, pushing December’s total up to 307,000 and November’s to 260,000. The bureau also updated its underlying population estimates to better account for immigration and vital statistics such as births and deaths. Because of these changes, the unemployment rate fell from 4.1% to 4%.

With the Fed looking for a clear sign of labor market weakness — or a noticeable decline in inflation — before lowering its benchmark interest rate again, the report likely does not move the needle on its policymaking considerations.

During last month’s Federal Open Market Committee meeting, Fed officials voted unanimously to hold its target interest rate range steady between 4.25% and 4.5%. The decision to pause came after the group lowered its benchmark interest rate a full percentage point during the final three meetings of 2024.

In his post-meeting press conference, Fed Chair Jerome Powell said the central bank’s policy stance is “very well calibrated” to current economic conditions and would not change until the FOMC sees material changes in either inflation or employment.

“Now, policy is meaningfully less restrictive than it was before we began to cut. It’s 100 basis points less restrictive,” Powell said. “And for that reason, we’re going to be focusing on seeing real progress on inflation or alternatively, some weakness in the labor market before we, before we consider making adjustments.”

The Fed’s initial decision to cut rates was driven by fears of a deteriorating employment situation, but subsequent strong jobs reports have alleviated those concerns, Fed Vice Chair Philip Jefferson said in a speech earlier this week. 

The unemployment rate trended up for several straight months in late 2023 and early 2024, a trajectory that Jefferson described as “an unusual pattern outside of a recession.” But with the rate having held steady since the middle of last year — and now falling slightly — the outlook is less dire.

“Looking broadly across the past several months, I see a labor market that is in solid condition and not a source of significant inflationary pressure,” Jefferson said. “While the downside risks of a rapidly weakening labor market appear to have lessened, I expect some further softening that could cause the unemployment rate to edge just slightly higher this year but stay in a range consistent with recent readings.”

Fed Gov. Michelle Bowman, in prepared remarks delivered last week, said the rise in unemployment in 2023 and 2024 was the result of weaker hiring rather than layoffs, which she took as a sign of stabilization after the ultra-tight job market that followed the COVID-19 lockdown. 

Bowman also reiterated her reluctance to base decisions too firmly on any single employment report, noting that they have been prone to significant revisions in recent years. She added that she hopes the new methodology introduced for this month’s report will reduce these variances. 

“It is crucial that U.S. official data accurately capture structural changes in labor markets in real time, such as those in recent years, so we can more confidently rely on these data for monetary and economic policymaking,” she said. “In the meantime, given conflicting economic signals, measurement challenges, and significant data revisions, I remain cautious about taking signals from only a limited set of real-time data releases.”

The Fed will see more economic data before the next FOMC meeting on March 18 and 19, including two inflation reports this month — first the Consumer Price Index then the Personal Consumption Expenditure index — next month’s jobs report and another CPI report in March.

For now, the likeliest scenario — barring significant changes to inflation data — is for the Fed to keep rates unchanged again next month. Some voting members on the FOMC, including Federal Reserve Bank of Atlanta President Raphael Bostic, are already bracing themselves for an extended hold period.

“I’m prepared, and I’m comfortable and very satisfied, to wait for a while and that would be fine,” Bostic said during a question and answer session at the Atlanta Rotary Club on Monday. “It depends on what happens. If it becomes clear where the economy is going, I will be good to move.”