Latest jobs report signals that interest rates are unlikely to drop anytime soon

Friday's blowout jobs report showing 353,000 jobs added in January versus expectations for 185,000 jobs is another signal that the U.S. economy remains strong.

But that good news also likely confirms the view of policymakers at the Federal Reserve that there is no rush to begin cutting interest rates, meaning the cost of borrowing for consumers — perhaps to buy a car or a house — will likely stay elevated for some time.

Earlier this week, the Fed announced it was leaving the current federal funds rate, which helps set interest rates for loans throughout the economy, unchanged at 5.25% to 5.5%.

In remarks after the announcement, Fed Chair Jerome Powell said he thought it was unlikely that the first rate cut of the post-pandemic period would come in March, as some investors were hoping. Inflation, he said, remains too hot — even at 3.4%. The central bank wants to get it back down to 2%.

“We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate,” he said, referring to that 5.25% to 5.5% range.

What the economists are saying

In a note to clients after Friday's jobs report, Seema Shah, chief global strategist at Principal Asset Management, said the data showed "there is absolutely no sign of a softening labour market or weakening wage pressures," meaning that despite thousands of layoffs in industries such as tech and media recently, other job sectors are still going strong.

As a result, a March rate cut is off the table, Shah predicted, adding that a cut in May, when the Federal Open Markets Committee will deliver its third interest rate decision of the year, also now seems to be "on ice."

"Certainly, with this kind of number," she said, referring to Friday’s jobs report, "the six or seven rate cuts that markets had been pricing in seems very offside."

Following the release of Friday's jobs report, financial market traders increased their odds of the Fed maintaining its current rate through May from just 6% to 27%, while the odds of the current rate staying the same through March climbed from 62% to 80%.

The latest jobs data was not without some red flags for monetary policymakers. One of them is the acceleration in average hourly earnings with no corresponding change in hours worked.

If those trends continue, it could even be a sign of stagflation: higher prices but slower economic growth.

“This would be wonderful if inflation were at its target," Sean Snaith, a University of Central Florida economist, wrote in a note Friday. "But now it means the current the Fed is swimming against just got stronger, and it’s going to be harder to get upstream," he said. While inflation has fallen dramatically since it peaked at 9.1% in June 2022, it has lingered stubbornly in the 3% range for the past seven months.

The jobs report also saw the continued trend in low survey response rates, as well as effects from severe winter weather, both of which may have skewed the numbers somewhat.

Still, the consensus among economic analysts is that higher interest rates are here to stay, for the time being.

"The much stronger than expected January jobs report, including upward revisions to job growth in previous months and a big increase in wages, makes a near-term cut in the fed funds rate less likely," Gus Faucher, chief economist at PNC, wrote in a note to clients Friday.

Federal Open Markets "Committee members will be concerned that strong job and wage growth in late 2023 and early 2024 could reignite inflationary pressures in the U.S. economy," he continued.

The upshot of it all: It is unlikely there will be a major change in borrowing rates anytime soon.