The stronger-than-expected US January non-farm payrolls report has prompted markets to delay expectations for the timing of the Federal Reserve's first interest rate cut. Traders have broadly pushed their forecast for the initial cut from June to July.
The report, released on Wednesday, February 11th, showed the US economy added 130,000 jobs in January, far exceeding the consensus estimate of 65,000 and marking the largest monthly gain in over a year. The unemployment rate fell to 4.3%, contrary to expectations it would hold steady. Furthermore, employment data for the full year 2025 was revised down significantly, revealing that the labor market's actual performance last year was much weaker than previously understood.
Nick Timiraos, the Wall Street Journal's chief economics correspondent often referred to as the "new Fed whisperer," commented that the January jobs report reinforces the Fed's resolve to maintain its pause on rate cuts for a longer duration. He referenced Fed Chair Powell's January 28th remarks, stating, "The economy has surprised us once again with its strength—this is not the first time." Timiraos suggested that attention has now shifted to the CPI data and its early-year price adjustments.
The report triggered a broad sell-off in US government bonds. The yield on the two-year Treasury note was on track for its largest single-day increase since October 2025. Pricing in the interest rate swap market indicated traders see less than a 5% chance of a Fed rate cut in March. The total amount of easing expected by December is now approximately 49 basis points, down from the 59 basis points anticipated on Tuesday. This robust data is also seen as making it more challenging for Fed Chair nominee Kevin Warsh to advocate for rate cuts in the future.
Wall Street institutions generally believe the strong employment data reduces the necessity for the Fed to cut rates before mid-year but does not entirely rule out cuts in 2025. Several firms still anticipate two rate cuts this year, albeit pushed back to the second half. The labor market's strength has also alleviated concerns about an economic recession, being viewed as a positive signal for risk assets.
**"New Fed Whisperer": Focus is on Stable Unemployment Rate**
Nick Timiraos pointed out on social media that, for the Fed, the key takeaway from the January report will be the recent stabilization in the unemployment rate, especially considering that 2025 job growth was revised down significantly, as widely expected. According to the latest revisions, the US added only 181,000 jobs in 2025, averaging just 15,000 per month, down from the previously revised figure of 49,000 per month.
When asked about the impact of the revisions, Timiraos responded, "The revisions were negative as expected, which in some ways makes the strength of the January preliminary figure even more notable."
He stated that attention has now turned to the CPI's early-year price reset, with Friday's upcoming January inflation data becoming the next critical indicator to watch.
**Fed's Wait-and-See Stance Strengthened**
Analysis suggests the January jobs report is likely to reinforce the Federal Reserve's wait-and-see posture, making it difficult for officials to find justification in labor market weakness for pushing further rate cuts.
This could provide more ammunition for inflation-wary "hawks," who would point to various indicators suggesting that interest rates are not substantially restraining economic activity. These signs include the continued decline in the unemployment rate, a decrease in the number of people working part-time because they cannot find full-time work, and a reduction in the number of people unemployed for more than six months—all suggesting the labor market has stabilized following its weakness last year that prompted three consecutive Fed rate cuts.
Concurrent with the January data, the Bureau of Labor Statistics (BLS) also announced a significant benchmark revision, lowering the total job growth for 2025 from an initially reported 584,000 to 181,000. This reduces the average monthly job gain from about 49,000 to approximately 15,000, making 2025 the weakest year for job growth since 2003, excluding crisis years.
**Treasury Sell-Off Post-Report, Short-Term Bonds Lead Declines**
US Treasury prices fell across the board following the employment data, with short-term bonds experiencing the largest declines and their yields rising the most. After the report, the yield on the two-year Treasury quickly rose above 3.50%, touching 3.55% at one point, an increase of about 10 basis points for the day. The benchmark 10-year yield rose above 4.20%, gaining about 6 basis points intraday.
Gennadiy Goldberg, TD Securities' head of US rates strategy, said the data implies "the Fed is in no rush to cut rates in the near term." However, "the market will struggle to price out all easing expectations for this year completely, as we view this strong print as a delay in cuts, not that the Fed is less likely to cut this year."
John Briggs, global head of desk strategy at Natixis, noted, "The market was expecting soft data and got the exact opposite. Given the Fed's focus on the labor market, a reduction in rate cut pricing is expected." Subadra Rajappa, a strategist at Société Générale, pointed out that the stronger-than-expected January labor market data has sparked speculation about how nominee Kevin Warsh would approach policy. "If Warsh is indeed inclined towards cutting rates, he may find it harder to persuade hawks to vote for cuts. Strong employment data and wage increases support a more cautious approach to policy."
**Wall Street Institutions: Rate Cuts Delayed, Not Canceled**
Tim Mahedy, a former senior advisor at the San Francisco Fed, stated, "This absolutely complicates the case for rate cuts. The January data was really strong."
Stephen Stanley, chief US economist at Santander US Capital Markets, said, "The health of the January data should undoubtedly nail shut the coffin on the view that the labor market is on the verge of collapse, which we've heard a lot from some of the Fed's doves."
Economists from Bloomberg Economics, including Anna Wong, commented: "The January jobs report reduces the urgency for the Fed to cut rates. However, as we expect inflation to slow in the coming months—particularly we anticipate the January CPI data on February 13th to be softer than market expectations—we believe policymakers have room to support the labor market's recovery with rate cuts. Overall, we expect the Fed to cut rates by 100 basis points this year."
Stephanie Roth, chief economist at Wolfe Research, said current key indicators suggest the labor market and broader economy are stabilizing, which does not immediately support calls for Warsh to cut rates. "This makes his job a bit more difficult."
Kay Haigh of Goldman Sachs Asset Management noted the labor market is showing initial signs of re-tightening, and the Fed's focus "will shift to the inflation picture, with the economy continuing to perform above expectations. We still see room for two more rate cuts this year, but an upside surprise in this Friday's CPI data could tilt the risk balance in a more hawkish direction."
TD Securities economists Oscar Munoz and Gennadiy Goldberg said they maintain their forecast for 25-basis-point cuts per quarter but have adjusted the timing to June, September, and December, bringing the federal funds rate to their projected terminal rate of 3%. "The expected easing would not be a result of deteriorating economic conditions, but a normalization of policy as inflation gradually returns to target."
Following Wednesday's jobs report, CIBC Capital Markets economists delayed their forecast for the next Fed rate cut. They still expect two cuts this year, but now in June and July, delayed from previous expectations of March and June. TD Securities economists pushed their forecast for the first cut from March to June.
Bret Kenwell, an analyst at eToro, said this is the type of report investors should welcome—even if it gives the Fed more reason to hold steady. "However, it's important to maintain perspective: this is one data point and does not erase the weakness depicted by other recent data. But if the labor market is indeed stabilizing, that would be positive for both the economy and markets."
Peter Graf, Chief Investment Officer at Amova Asset Management Americas, stated, "Today's jobs report is a perfect 10, with positive surprises across the board. This should quell recent growth concerns but places incoming Fed Chair Warsh in a tough spot—convincing FOMC members to cut rates as the administration desires will become more difficult."
Angelo Kourkafas, investment strategist at Edward Jones, said the report provides ammunition for Fed hawks, supporting a patient approach to rate cuts and reinforcing the narrative that the labor market is stabilizing.
He said, "The bond futures market is now fully pricing in the first Fed rate cut for July instead of June. From a portfolio perspective, we expect the 10-year yield to settle in the middle of the 4% to 4.5% range, and we believe the rotation into 'old economy' and cyclical sectors should continue."
Comments