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 for rate cuts, while rising oil prices driven by Middle Eastern 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 exceeding the market forecast of 0.3%. The labor force participation rate fell to 62.0%, the lowest since December 2021. Household survey employment decreased by 185,000, primarily responsible for the unemployment rate rising from 4.3% in January to 4.4%.

Looking at sectors, employment in healthcare declined by 28,000, mainly due to doctor’s office strikes, which cut 37,000 jobs that month. The information industry saw a further decline of 11,000 jobs, continuing a year-long contraction. Federal government employment decreased by 10,000.

Since reaching its peak in October 2024, federal employment has decreased by 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.

Aside from healthcare worker strikes and harsh weather, the job 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 the business model used by the BLS to estimate employment changes based on new business openings or closures.

In 2025, the labor market was temporarily impacted by uncertainties from President Trump’s large-scale tariff policies, but it is gradually stabilizing. The BLS incorporated revised population base data delayed by the 43-day government shutdown last year. Additionally, tighter immigration policies have reduced labor supply, further hampering the recovery.

A summary by First Financial reporters shows 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 is stabilizing. When companies start reducing jobs and layoffs increase, unemployment benefit claims tend to rise, making it 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 before conflicts with Iran and the Supreme Court ruling Trump’s tariffs 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 labor market appears stable but is no longer in the typical American state. 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 job outlook for 2026 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 stable 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 analysts believe that concerns will only be triggered if the unemployment rate surpasses 4.5%, prompting the Fed to act.

Meanwhile, escalating Middle Eastern conflicts have heightened inflation fears, and 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 oil prices rising due to Iran tensions, policy faces dual risks.

The Fed’s next policy meeting is scheduled for March 17-18, with widespread market expectations to keep the benchmark rate unchanged at 3.50%-3.75%.

Morgan Stanley Chief U.S. Economist Ellen 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 renewed inflation from sustained high oil prices may force the Fed to hold steady.”

Fitch Ratings’ U.S. chief economist Olu Sonora wrote, “From any perspective, this is bad news. With tariffs re-emerging, rising energy prices, and new inflation pressures, the Fed is like a ‘deer in the headlights’ before these trends become sustainable and actionable.”

Some strategists expect oil prices could eventually break through $100 per barrel, but this may not immediately impact U.S. inflation significantly. Only if conflicts last longer than expected, and high energy costs transmit through the economy, raising 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 impact will persist or cause demand destruction.”