Strong January Jobs Report Takes March Fed Rate Cut Off the Table

The January jobs report showed that the U.S. economy continued to crank out new jobs to kick off 2024, confounding expectations of cooling in hiring and pushing forward the Federal Reserve’s anticipated pivot toward lowering interest rates.

The economy created 353,000 new jobs in January, according to the Bureau of Labor Statistics, roughly double the amount economists predicted. In addition, the government’s revisions to prior months’ readings showed that hiring was stronger in the second half of 2023 than what had originally been reported.

The data has investors rethinking the timing around Fed rate cuts. Coming into 2024, the bond market had been priced for six rate cuts in 2024, with the first coming in March. But comments from Fed Chair Jerome Powell on Wednesday, in which he downplayed the possibility of a March cut, along with the jobs report has investors thinking the first cut will be delayed until May.

“Today’s jobs report has deflated chances of a March rate cut, but it’s much too soon to say the same about May and later in the year,” says Preston Caldwell, Morningstar’s chief U.S. economist. “The jobs numbers have gone from slightly decelerating to slightly accelerating.”

January Jobs Report Key Stats

• Total nonfarm payrolls increased by 353,000 vs. FactSet consensus forecast of 176,500.
• The unemployment rate held steady at 3.7% vs. forecasts of 3.8%.
• Average hourly wages climbed by 0.6% to $34.55, after rising 0.4% in December.

Jobs Report Shows Faster Growth In Hiring

“The latest data paints a much different picture of job growth than we had before,” Caldwell says. “The data now shows three-month growth for nonfarm payroll employment at 2.2% annualized as of January 2024. This is much higher than the [December data] showing 1.3% three-month growth.” He notes that the pace of job growth is also slightly above the 1.7% average annual growth during the pre-pandemic years of 2015-19, which he says can be seen as a benchmark for a “normal” rate.

With the January report came routine annual benchmark revisions, which resulted in large changes to estimates of job growth for 2022 and 2023. Under the hood of these revisions, Caldwell notes that the level of employment for March 2023 was revised down, while levels for the end of the year were left unchanged. “This boosted estimated job growth in the second half of 2023,” he says.

Diverging Pictures of Hiring Within the Jobs Report

Caldwell cautions that the picture painted by the nonfarm payroll data is contradicted by other BLS data released Friday. The report consists of two main parts. Nonfarm payroll employment information comes from an establishment survey of firms. A separate survey of households provides the basis for the unemployment rate.

“Nonfarm payroll employment is up 1.9% year over year, yet household employment—adjusted to make an apples-to-apples comparison with the former—is up merely 0.7%,” Caldwell says. “This discrepancy signals that job growth could be a bit weaker in reality than the headline nonfarm payroll figures show.”

With that divergence, “it’s no surprise, given the weak growth in household-measured employment, that unemployment rates are up slightly compared with a year ago,” he says. “Likewise, the latest data also shows labor force participation almost flat versus a year ago, at 62.5% in January 2024 versus 62.4% in January 2023.”

White-Collar Jobs Drive Hiring Growth

The BLS reports that the increase in hiring was led mainly by professional and business services, healthcare, retail trade, and social assistance. Meanwhile, employment fell in the mining, quarrying, and oil and gas extraction industries.

The acceleration seen in employment growth was largely driven by so-called “white-collar” jobs. “Employment in the information, professional services, and management and administration categories all accelerated sharply in recent months after being flat-to-down earlier in 2023,” Caldwell notes.

January Report Shows Jump In Wages

In addition to the unexpectedly strong increase in hiring, the report showed a large uptick in wages. For the Fed and some investors, the concern is that hot wage growth will translate into higher inflation, or at least make it more difficult for the central bank to continue bringing inflation down.

However, Caldwell cautioned against reading too much into the wage numbers. “While the January data did show a seemingly alarming uptick in average hourly earnings—a 6.8% month-over-month annualized rate—this data is fairly noisy,” he says. “The year-over-year growth rate remains at 4.5% in January, averaging 4.3% in the last three months. And the latest data from the employment cost index showed a further deceleration in the fourth quarter. Thus, wage growth is highly unlikely to be reaccelerating.”

When Will the Fed Cut Rates?

In response to the jobs report, bond traders scaled back their expectations for when the Fed will start cutting rates. According to the CME FedWatch Tool, the odds of the central bank lowering the federal-funds rate at its March meeting are now 21.5%, down from 46% a week ago and just shy of 70% at the beginning of January.

“Altogether, today’s numbers confirm the picture painted by fourth-quarter GDP growth that the economy is expanding at a robust pace,” Caldwell says. “Given the hawkish tilt Powell indicated this week, this largely rules out a March rate cut.”

However, bond traders are still leaning toward the Fed cutting rates in May. The central bank is given a 57% chance of lowering the funds rate at its May meeting versus a 29% chance of holding rates steady. Just a month ago, the market was suggesting the Fed would be making its second cut at that meeting.

“It’s premature to be significantly downgrading the odds for rate cuts in May and the rest of this year,” Caldwell says. “The Fed knows employment is a lagging indicator. They don’t want to wait for employment to fall before initiating cutting. By May, progress on inflation will be sufficient by our projections to leave no doubt on the appropriateness of cutting the federal-funds rate.”