The February jobs report revealed a rise in the unemployment rate to 4.1%, accompanied by monthly net nonfarm payroll gains of 151,000. Despite a modest pace of job gains and rising unemployment in February, the U.S. labor market is solid. Before the jobs report was released, the odds were already low for an interest rate cut in the next Federal Reserve decision on March 19, and the February jobs report further lowered rate cut expectations. However, due to the modest level of payroll gains against a backdrop of trade policy and tariff uncertainty accompanied by weakened consumer and business confidence, the odds of a June Fed interest rate cut increased following the release of the February jobs report. The potential for a deceleration in year-on-year consumer inflation could cinch the next Fed rate cut in May or June 2025.
February Jobs Report Shows Rise In Unemployment Rate And Modest Monthly Gains
The Employment Situation report, known to economists and analysts as the jobs report, was modestly positive for February 2025. It reaffirmed that the labor market is on solid footing, but it also reduced the chances of a March interest rate cut by the Fed.
On the upside, total U.S. payrolls are now at a record high of 159.2 million jobs.
Unfortunately, some data in the report was weak. The unemployment rate rose modestly to 4.1% from 4%, and February payrolls were only modestly positive at 151,000, although this represented an acceleration from the downwardly revised January gain of 125,000 net new jobs.
Other data in the jobs report also weakened, especially in the Household Survey, which showed that the employed series fell by 588,000 jobs, and the unemployed series rose by 203,000.
While the February jobs report does not refute the claim that the U.S. labor market is relatively solid, other recent data reinforce the notion that the U.S. labor market is on solid footing. After all, initial and continuing jobless claims are very low. Continuing claims are at 1.897 million, which is only around 1.1% of the labor force. Initial jobless claims are also very low, at just 221,000.
Strong Job Openings and Labor Turnover Survey data showed that there were 7.6 million open jobs in December 2024. While that figure is roughly 4.6 million fewer open jobs than the historic high in March 2022 of 12.2 million, 7.6 million open jobs would have been a record high before the Covid-19 pandemic. With a difference of around 5.7 million open jobs versus people collecting unemployment, it is difficult to expect very large net payroll losses across multiple months anytime soon.
According to Prestige Economics — ranked the most accurate U.S. unemployment rate forecaster in the world for a second consecutive quarter, according to Bloomberg’s latest rankings — the U.S. unemployment rate is likely to rise modestly on trend in 2025 while remaining relatively low.
The Future Of Consumer Inflation After The Jobs Report
The Fed has a dual mandate to support full employment and keep inflation rates low and stable. The February jobs report, December JOLTS data, and recent weekly jobless claims reflect full employment in the U.S. labor market. However, consumer prices are not yet low and stable. Nor are consumer inflation rates yet at the Fed’s 2% inflation target.
Year-on-year consumer inflation rates accelerated in the January 2025 the Consumer Price Index, although inflation rate dynamics were more benign in the Personal Consumption Expenditures inflation. January year-on-year inflation rates were 3% for total CPI, 3.3% for core CPI, 2.5% for total PCE, and 2.6% for core PCE.
Year-on-year total CPI and PCE consumer inflation rates are likely to fall to the Fed’s 2% target in 2025, but they are currently above target—and core inflation rates could remain above the Fed’s 2% for most or even all of 2025.
Due to the currently elevated inflation rates, no change in Fed policy is likely on March 19. However, Prestige Economics expects the next 0.25% interest rate cut is likely to come in May or June 2025 due to a likely slowing in U.S. year-on-year consumer inflation rates in Q2 2025 as well as elevated downside risks to growth due to tariff-induced declining business and consumer confidence, which have weighed on the Atlanta Fed’s GDPNow estimate for Q1 2025 gross domestic product.
Fed Implications Of The February Jobs Report
Interest rate cuts are likely in 2025 and 2026, and the latest December 2024 Federal Open Market Committee projections reflect expectations of two 0.25% rate cuts in 2025. Inflation is the Fed’s top concern, which is why the Fed left interest rates unchanged at its most recent meeting on January 29. However, due to tariff uncertainty and related knock-on effects, FOMC projections that will be released on March 19 may reflect more rate cuts in 2025 and 2026 than the December FOMC projections.
A solid labor market gives the Fed the license to leave interest rates unchanged, which is why the February jobs report provides further support for the Fed to maintain the current interest rate policy at its next meeting on March 19. This dynamic played out after the jobs report in the CME FedWatch Tool, which reflects Fed rate cut probabilities.
Before the release of the February jobs report, the odds of no change in March Fed rate policy were 91% as of 7:11 a.m. ET on March 7. After the jobs report was released at 8:30 a.m. ET, these odds rose to 97% as of 12:17 p.m. ET, rendering the odds of a March rate cut effectively zero.
While the odds of a March rate cut fell close to zero after the February jobs report was released, the odds of a May rate cut from current levels remained relatively unchanged. Before the release of the jobs report, the odds of no change in May Fed rate policy from the status quo were 54.4% as of 7:11 a.m. ET on March 7. After the release of the jobs report, this was up slightly to 56.6% as of 12:17 p.m. ET. In other words, the odds of at least one rate cut by May 7 fell from 45.6% to 43.4% after the jobs report was released.
Most importantly, the odds of no change from the current Fed interest rate policy at the June Fed meeting were only 14% before the jobs report. After the jobs report, this fell further to 10.9% as of 12:17 p.m. ET. In other words, the odds of at least one Fed interest rate cut on June 18 rose from 86% to 89.1% after the jobs report was released.
Market Implications Of The February Jobs Report
The February jobs report is encouraging for those anticipating more interest rate relief because the unemployment rate rose and labor market data were only modestly positive, despite an acceleration in monthly nonfarm payroll gains.
While the labor market has slowed over the past three years, the February jobs report does not support a change in Fed interest rate policy on March 19. However, the odds of at least one Fed interest rate cut on or before June 18 are now very high at 89.1%.
Higher chances of Fed interest rate cuts are likely to support bond prices, equities, and commodity prices while weighing on bond yields and the dollar.
Inflation remains the lynchpin that will determine whether the Fed has the license to cut rates in future policy decisions this year. Looking ahead to the February U.S. CPI inflation report on March 12, Prestige Economics expects modest year-on-year decelerations in total CPI and core CPI due to base effects.
Prestige Economics also expects year-on-year total CPI and total PCE to decelerate in Q2 2025 due to base effects, potentially falling below the Fed’s 2% target in 2025. However, core CPI and core PCE measures of inflation are likely to remain elevated and above the Fed’s 2% target through most, if not all, of 2025.
If year-on-year total CPI and total PCE inflation rates ease, the dollar and bond yields could fall in Q2 while supporting equities, bond prices, and industrial commodity prices.
What do you think about the February jobs report and the outlook for consumer inflation?
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