"Non-farm payroll data dampens rate cut expectations; market reassesses the Fed's policy trajectory"

The latest release of US employment data for January unexpectedly strong, significantly cooling market expectations for the Federal Reserve to cut interest rates again before mid-year. As the labor market continues to stabilize, concerns about the unemployment rate rising have weakened and related risks no longer seem as urgent. The data shows that the US added 130,000 jobs in January, with the unemployment rate dropping to 4.3%. This data, released by the US Department of Labor on Wednesday, alleviates concerns about worsening employment in the market. It was these concerns that led the Federal Reserve to cut interest rates three times in late 2025 and to remain unchanged in January of this year. During last month's policy meeting, Federal Reserve officials mentioned signs of stabilization in the labor market as a reason for keeping interest rates unchanged. Following the release of the latest employment report, traders quickly lowered the probability of a rate cut in the June meeting, which was previously seen as the most likely time for the next rate cut, to below 50%. Tim Mahedy, former senior adviser at the Federal Reserve Bank of San Francisco, said: "This undoubtedly complicates the case for rate cuts, as the January data was indeed very strong." However, economists also caution that the impressive performance in January may still be revised downward, and job growth is still concentrated in a few industries, primarily in healthcare. Revisions to data from last year show that the average monthly job growth was only 15,000, far lower than the initially reported 49,000. Nevertheless, Stephen Stanley, Chief US Economist at Santander US Capital Markets, pointed out that the rebound in January is enough to alleviate concerns about the unemployment rate continuing to rise due to the impact of artificial intelligence and corporate hiring expectations. Stanley said: "The strength of the January data has basically put an end to the idea that the labor market is about to collapse, which was frequently mentioned by some doves at the Federal Reserve." Meanwhile, policy disagreements continue to brew. Kansas City Federal Reserve Bank President Schmid said on Wednesday that the central bank still needs to maintain interest rates at restrictive levels to continue downward pressure on inflation, and noted that they had not seen "too many signs of contraction" in economic data. On the other hand, Trump continues to call for rate cuts. After the employment data was released, he praised the "excellent employment data" on social media and said that the US should enjoy the lowest interest rates in the world. His National Economic Council Director Kevin Hassett also told the media that the Federal Reserve still has ample room to cut rates, citing that supply shocks brought about by artificial intelligence will promote economic growth without pushing up inflation. Kevin Warsh, who had been nominated by Trump to replace Powell as Federal Reserve Chairman, also shares a similar view. Research suggests that the January nonfarm employment report has weakened the urgency for the Federal Reserve to quickly cut rates, but if inflation continues to fall in the coming months, policy space still exists. The institution expects the Federal Reserve to be able to cut rates by a total of 100 basis points this year. However, many observers emphasize that it is still too early to determine the policy direction for June. Stephanie Roth, Chief Economist at Wolfe Research, said that key indicators currently show that the labor market and the overall economy are strengthening, which is not completely in line with Warsh's proposal for rapid rate cuts. "This does make his job a bit more difficult."