February Non-Farm Payrolls Add Jobs, "New Federal Reserve News Agency": The Federal Reserve's most feared scenario is approaching

U.S. non-farm employment unexpectedly declined sharply in February, abruptly shaking the previous assumption that the labor market was stabilizing. At the same time, the Federal Reserve faces a dilemma of softening employment versus high inflation.

The non-farm payroll report released on Friday, March 6, showed a decrease of 92,000 jobs in February, the second-largest monthly decline since the COVID-19 pandemic, while analysts expected an increase of 55,000. The February unemployment rate did not stay flat at 4.3% as anticipated but rose to 4.4%. Meanwhile, conflicts in the Middle East pushed energy prices higher, further intensifying inflation pressures. Weak employment combined with rising oil prices make it more difficult for the Fed to choose between maintaining employment and reducing inflation through interest rate adjustments.

Several Federal Reserve officials and Wall Street economists expressed concern over this report but generally stated they would not rush to change policy based on a single month’s data. Nick Timiraos, chief economics correspondent for The Wall Street Journal, known as the “New Fed Communications Channel,” pointed out that this report brings the Fed “one step closer” to its most feared scenario—simultaneous rising inflation and declining employment. The interest rate swap market shows traders currently expect the Fed to cut rates by one or two more times this year.

Report Highlights: Broad Weakness in Employment, Wages, and Participation Rate

The U.S. Bureau of Labor Statistics (BLS) reported on Friday that February’s employment decline was widespread. Leisure and hospitality, construction, and manufacturing saw job losses due to bad weather, with manufacturing employment falling to a four-year low. Healthcare, transportation, warehousing, and information sectors also experienced layoffs. Over 30,000 Kaiser Permanente employees were on strike for most of February, directly impacting healthcare employment data.

Revisions to the previous two months’ data further cloud the employment outlook. December’s employment was revised downward from an increase of 48,000 to a decrease of 17,000. January’s job gain was slightly revised up from 126,000 to 130,000, resulting in a net downward revision of 69,000 jobs over the two months.

Wage growth remains relatively strong. Average hourly earnings in February increased by 3.8% year-over-year and 0.4% month-over-month, both exceeding expectations by 0.1 percentage points. This marks the second consecutive month of 0.4% monthly growth, adding uncertainty to inflation prospects.

The labor force participation rate in February fell to 62%, the lowest since 2021, down from 62.5% in January. Participation among prime-age workers (25-54) also declined.

The report notes that the household survey incorporated the latest population estimates from the Census Bureau, delayed due to last year’s government shutdown. After the Trump administration tightened immigration policies last year, population figures were revised downward, leading to a contraction in labor force size and employment levels.

“New Fed Communications Channel”: The Fed May Just Watch and Wait

Timiraos directly interprets the deeper policy implications of this report, suggesting the Fed is “closer than ever” to the feared scenario of simultaneous inflation and employment decline. The article begins:

“The Fed’s greatest fear has always been being forced to choose between fighting inflation and protecting jobs. Friday’s employment report brings that dilemma a step closer to reality.”

Timiraos notes that just weeks ago, strong January non-farm payroll data had given markets hope for employment stability. This February report dashed that hope and reignited concerns about a quietly worsening employment situation. Meanwhile, geopolitical tensions involving the U.S. and Israel against Iran, including the blockade of the crucial Strait of Hormuz, threaten large-scale energy production and add new inflationary pressures.

He cites Neel Kashkari, President of the Minneapolis Fed and a voting member of the FOMC, who recently warned that the situation could be a “copycat” of the Russia-Ukraine conflict, and cautioned the Fed against repeating the mistake of 2021 when it dismissed inflation as temporary:

“If this turns out to be another global commodity shock, do we really want to go through ‘Transitory (Inflation) 2.0’ again?”

Timiraos also mentions that the market’s reaction to the employment data was muted, with the 10-year U.S. Treasury yield responding gently, indicating investors believe the Fed’s room to cut rates is significantly limited amid rising inflation risks.

Citing Austan Goolsbee, Chair of the Chicago Fed with voting rights on the FOMC next year, Timiraos notes that once inflation expectations are shaken, they are hard to restore—“like a sunburn. By the time you see it, it’s too late to put on sunscreen.” Goolsbee said this past Friday:

“We shouldn’t overreact to one month’s data, but a scenario where both inflation and unemployment are rising is not good for the Fed.”

Regarding the Fed’s next move, Timiraos predicts:

“Right now, Fed officials may just sit and watch. Fed Chair Jerome Powell, who urged other FOMC members to cut rates three times last year, faced increasing internal debate each time.

Officials have made it clear they are not eager to adjust rates at this month’s meeting, and even if one month’s data is worrying, it’s unlikely to change that stance.”

He believes that if unemployment continues to rise in the coming months, the Fed might restart rate cuts by mid-year. However, if inflation data rises again before then, internal resistance will grow. He concludes that a central bank facing both weakening employment and reignited inflation risks has “almost no good options.”

Wall Street: The Stable Employment Outlook Crumbles, but Panic Is Premature

The data dealt a heavy blow to Wall Street’s previous view that the employment market had bottomed out and was stabilizing, with mixed reactions across institutions.

Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, harshly stated: “With this report, the belief that the employment market has turned from danger to safety has completely collapsed.”

Omair Sharif, president of Inflation Insights, pointed to the underlying fragility of the labor market: “This shows the labor market has become so weak—3,100 healthcare workers on strike, and the entire market can’t bear it because other sectors aren’t adding workers.”

Sharif characterized the current situation as a “mixed bag of weakening employment and potential rising inflation, quite tricky.”

Stephen Stanley, chief U.S. economist at Santander Capital Markets, was more cautious: “Looking at January’s strength and February’s decline together, is it time to panic? No.”

Fitch’s U.S. chief economist Olu Sonola said: “Just when the market thought employment was stabilizing, this report delivers a blow. It’s bad news from every angle.”

Economists from Bloomberg, Anna Wong, Stuart Paul, and Chris G. Collins, believe that the weak February employment data indicate fragility in recent employment stability. They tend to see the current situation as a “cooling” rather than a “sharp deterioration,” and expect it will strengthen the case for the Fed to cut rates later this year.

Wells Fargo senior economist Michael Pugliese raised a key question: “You never fully change the narrative based on one report, but it does make you wonder—how solid is the employment stability? Is it fragile, or has it already been firmly established? The gap is huge.”

Federal Reserve Officials: More Focused on Employment, Likely to Hold Steady This Month

Several Fed officials responded quickly on the day of the report’s release, acknowledging the disappointing data but not signaling an urgent policy shift.

Chicago Fed President Goolsbee told the media: “Today’s employment report is disappointing. If the trend continues for the next few months, it will be a worrying sign for the labor market.”

San Francisco Fed President Mary Daly, who has voting rights on the FOMC next year, said in an interview: “Hoping for the labor market to stabilize may have been overly optimistic. We really need to keep a close eye on the labor market.”

Boston Fed President Susan Collins and Cleveland Fed President Beth Hammack, both with voting rights this year, stated they believe rates should remain “for some time.”

FOMC voting member Christopher Waller, a Fed governor, said before the report that he does not expect Iran’s conflict to have a lasting impact on inflation but acknowledged consumers will feel the price shocks at the pump. He also noted that if employment continues to weaken, the question of “why not hold steady” will become unavoidable.

The Fed will enter a silent period after midnight on Saturday, ahead of the March 17-18 FOMC meeting. From this weekend, officials will no longer publicly comment on monetary policy. Markets generally expect rates to remain unchanged at this month’s meeting, as at the January meeting.

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