Blockbuster Jobs Report Strengthens Fed Patience As It Waits for Rate Cuts

Federal Reserve officials left interest rates unchanged this week and indicated their next step will likely be a cut — but they also signaled they are in no rush to make that change. Friday's jobs figures are likely to support their cautious stance.

Employers hired much faster than expected in January, and average hourly wages rose 4.5 percent over the year, the fastest pace since September and a turnaround after months of slowdown.

While Fed Chairman Jerome H. Powell made clear during his news conference on Wednesday that the central bank has no intention of keeping rates high just to slow the labor market, the report suggested the economy may not be cooling off completely. as much as policymakers expected.

And given that continued strength, the Fed is unlikely to feel pressure to cut rates at its next meeting in March. While policymakers do not want to keep borrowing costs too high for too long and risk a painful recession, the data suggests that a possible downturn is still very far away. Instead of faltering, the job market is booming.

The central bank's policy rate is now set at 5.25 to 5.5 percent, a level high enough that economists say it will cool the economy as it trickles through financial markets and weighs on mortgage, credit card and business loans.

The Fed's goal in cooling the economy is to curb inflation, and price increases have been easing: Over the past six months, inflation data has been near normal.

But that happened without much broader economic slowdown. Although job openings have fallen and the housing market has slowed in response to higher rates, both employment and consumer spending have remained surprisingly resilient.

Mr. Powell suggested this week that the Fed would like to see more evidence that inflation is coming under control before it starts cutting rates, and that it is unlikely to have enough data before March to be confident about that.

Markets sharply reduced the chances of a rate cut at that meeting after Friday's jobs data.

But notably, Mr. Powell said the Fed is prepared to be patient — rather than wary and reactive — as it waits for wage growth to slow to normal levels. Some economists think the current relatively rapid pace of wage increases could prevent inflation from stabilizing at 2 percent over time, if they were to gain the upper hand.

“I think the labor market is at or near normal by many measures, but not completely back to normal,” Mr. Powell said. “Vacancies are not quite back to where they were,” and wage increases “are not quite back to where they were.”

He added that wage increases will “probably take a few years to come back all the way, and that's OK.”