A sharp drop of 92,000 jobs! U.S. non-farm payrolls in February face a "cold snap"—Will the Federal Reserve still be able to cut interest rates?

Affected by healthcare worker strikes and severe cold weather, the U.S. economy unexpectedly lost jobs in February, with the unemployment rate slightly rising. Latest interest rate futures pricing shows limited market expectations of rate cuts, while rising oil prices driven by Middle East geopolitical tensions have put the Federal Reserve in a dilemma.

Is the Labor Market Warning Sounding?

The U.S. Bureau of Labor Statistics (BLS) released its employment report on Friday, showing a decrease of 92,000 non-farm jobs in February, compared to market expectations of a 59,000 increase; January data was revised to show a 126,000 increase. Meanwhile, average hourly earnings rose 0.4% month-over-month, matching January’s growth rate and beating market expectations of 0.3%. The labor force participation rate fell to 62.0%, the lowest since December 2021. Household survey employment decreased by 185,000, mainly responsible for the unemployment rate rising from 4.3% in January to 4.4%.

Looking by sector, employment in healthcare declined by 28,000, mainly due to doctor’s office strikes, which cut 37,000 jobs that month. Information sector employment fell again by 11,000, continuing a year-long contraction. Federal government employment decreased by 10,000.

Since reaching its peak in October 2024, federal employment has declined by a total of 11%. Transportation and warehousing jobs fell by 11,000 in February, and since peaking in February 2025, employment in this sector has decreased by 24,000. Social assistance employment continued to expand, adding 9,000 jobs, mainly driven by growth in personal and household services. Other major industries such as manufacturing, construction, retail, financial services, and hospitality saw little change.

In addition to healthcare worker strikes and harsh weather, the employment decline in February also reflects a correction from the sharp growth in January. Analysts believe that January’s job gains were aided by updates to business models—the models used by the BLS to estimate employment changes based on new business openings or closures in a given month.

By 2025, the labor market was temporarily impacted by the uncertainty caused by large-scale tariffs implemented under President Trump, but it is now gradually stabilizing. The BLS has incorporated revised population base data delayed by 43 days of government shutdown last year. Additionally, tighter U.S. immigration policies have reduced labor supply, further hampering the recovery.

A summary by First Financial indicates that despite several high-profile layoffs, the U.S. unemployment rate remains relatively low. For example, claims for unemployment benefits remain near recent lows, reinforcing signals that the job market has stabilized. When companies start reducing jobs and layoffs increase, unemployment benefit claims tend to rise, making them one of the best leading indicators of economic deterioration. Currently, there are no signs of a surge in layoffs, and recent data suggest the economy has rebounded—at least prior to conflicts with Iran and the Supreme Court ruling that Trump’s tariffs are unconstitutional.

Another report from employment consultancy Challenger Gray & Christmas this week shows a significant decline in layoffs announced by U.S. companies in February. They announced 48,307 layoffs, down 55% from January and 72% from the same period last year. However, hiring plans remain weak, with planned hiring down 63% compared to February last year. Weak hiring activity indicates some unemployed individuals are experiencing long-term unemployment.

Overall, the job market appears stable, but it is not the typical American scenario. Layoffs are few, and hiring is also limited. For example, in 2025, the U.S. added only 181,000 jobs for the entire year—the second-lowest increase in non-recession years in history.

The outlook for 2026 hiring remains bleak. The Federal Reserve’s “Beige Book” released Wednesday states, “Employment levels have been generally stable in recent weeks, with seven of the twelve Federal Reserve districts reporting no change in hiring. Several districts’ surveyed businesses cited rising non-labor input costs, weakening demand, or economic uncertainty as reasons for steady or declining employment levels.”

Policy Outlook Clouded in Uncertainty

Despite the rise in the U.S. unemployment rate in February, it remains at a historic low. Some market views suggest that only when the unemployment rate exceeds 4.5% will concerns trigger the Fed to act.

Meanwhile, escalating Middle East conflicts have heightened inflation fears. Economists believe there is no urgent need for the Fed to restart rate cuts. Oil price tracking agency GasBuddy reports that U.S. gasoline prices rose slightly on Thursday, with the national average at $3.25 per gallon, nearly 9% higher than a week ago.

It is noteworthy that ongoing conflicts could pose downside risks to the labor market. Stock market volatility may lead high-income households, the main consumers, to cut spending. San Francisco Fed President Mary Daly said Friday that weak U.S. employment data highlights her concerns about the labor market, but this does not mean the Fed should immediately cut rates. With inflation still too high and Iran-related oil price increases, policy faces dual risks.

The Fed’s next policy meeting is scheduled for March 17-18, with markets widely expecting the benchmark interest rate to remain between 3.50% and 3.75%.

Morgan Stanley Chief Economist Allen Zentner said, “Today’s data could put the Fed in a bind. A significant weakening in the labor market could support rate cuts, but the risk of prolonged high oil prices triggering another inflation surge may force the Fed to hold steady.”

Fitch Ratings’ U.S. economist Olu Sonora wrote, “From any perspective, this is bad news. Rising tariffs, higher energy prices, and new inflation pressures, combined with these data forming unsustainable or unmanageable trends, leave the Fed like a ‘deer in headlights,’ powerless to act.”

Some strategists expect oil prices to eventually break through $100 per barrel, but this may not immediately and significantly impact U.S. inflation. Only if conflicts persist longer than expected, and high energy costs are transmitted throughout the economy, increasing residents’ living costs, will this scenario materialize. BCA Research team noted in a client report, “So far, the Iran conflict has only caused moderate inflation shocks and has not led to stagflation. While energy prices are rising and physical transportation is disrupted, it is still too early to determine whether this shock will persist or cause demand destruction.”