The Jobs Market May Be Weaker Than the Fed Thinks

The Labor Market Narrative Is Starting To Crack

One of the biggest questions for markets right now is whether the economy is actually strong enough to justify more rate hikes. For the last several weeks, the market has been wrestling with the idea that the Fed may need to keep policy tighter for longer, or even hike again, because inflation is still too high and the labor market is supposedly holding up. But the jobs data discussed on today’s show pushes back against that story. ADP came in at 98,000, which was weaker than expected. Then the BLS report came in at only 57,000, which was roughly half of what the market was looking for. On top of that, prior months were revised lower by 74,000 jobs. That is the kind of detail that matters because the headline number is already weak, and then the revisions tell us the previous data was probably overstating strength too. That is not the clean, resilient labor-market picture you want to see if you are trying to argue that the Fed needs to hike rates.

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Why Revisions Matter

The revisions are arguably just as important as the headline number. A 57,000 jobs print is already soft, but when the prior two months are revised down by 74,000, it raises a bigger question: how much confidence should we really have in the first version of these reports? This has been an ongoing issue. The show pointed out that when looking at the longer-term BLS jobs chart going back to November 2024, the labor market does not look especially strong. There have been multiple readings below the red line, signaling negative reports, and that does not exactly scream “overheating economy.” The other issue is that these numbers may still be revised again later through QCEW revisions. Historically, those revisions can sometimes make the labor market look much weaker than the initial BLS reports suggested. So if the current data already looks soft, there is a real chance the final picture could look even softer once the revisions work their way through. That matters because markets, policymakers, and investors often react to the first version of the data. But if the first version is too optimistic, then policy can end up being too tight for an economy that is already slowing.

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The Fed’s Rate-Hike Argument Gets Weaker

The entire case for more rate hikes depends on two things staying true at the same time. First, inflation needs to remain too hot. Second, the economy needs to be strong enough to handle more tightening. The jobs data challenges the second part of that argument. If ADP is only showing 98,000 jobs, BLS is only showing 57,000, and previous months are being revised lower by 74,000, then it is hard to say the labor market is running too hot. It may still be functioning, but functioning is not the same thing as overheating. There is a big difference between an economy that is strong enough to tolerate higher rates and an economy that is already starting to lose momentum under the surface. This is why the latest jobs numbers are important for risk assets. If the labor market is weakening, it reduces the pressure on the Fed to hike. It also supports the idea that Warsh may sit on his hands and do nothing with rates this year, especially while waiting for more clarity from the task forces and incoming inflation data.

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Oil Could Do Some of the Fed’s Work

The jobs data is not happening in a vacuum. It is happening at the same time oil has already retraced most of its war-driven move. WTI oil peaked around $117 per barrel after the escalation, but today it is back near $68 to $70. That is very close to the pre-war level around $67. The issue is that gas prices, yields, and inflation data have not fully caught down yet. Gas is still around $3.78 compared with under $3 before the war, meaning the pump has only retraced about 46% of the move even though WTI has retraced nearly all of it. That lag matters. Gas prices usually rise quickly when oil spikes, but they come down much more slowly. If oil stays lower, the expectation is that gas prices should eventually follow, and that should filter into inflation readings over time. So now the Fed is looking at a situation where oil is no longer applying the same inflation pressure, gas may start cooling with a lag, and the jobs market is showing signs of weakness. That is not exactly a strong setup for more hikes.

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The Market Is Still Programmed To React To the Fed

Even if the rate-hike argument is weakening, the market is still programmed to react to Fed commentary, dot plots, and minutes. That is why the upcoming Fed minutes matter. This was Warsh’s first meeting presiding over the Fed, and markets will be looking closely for any signs of how the committee is thinking about inflation, labor, oil, and future rate policy. The problem is that some Fed speakers are still trying to frame the situation in hawkish terms. The show called out Beth Hammack’s argument that lower oil prices could be inflationary because consumers may have more discretionary income. That is a strange argument because higher oil prices are obviously inflationary too. It creates a frustrating dynamic where almost anything can be framed as a reason to stay tight. But the data is starting to make that harder. If oil is down, inflation expectations are improving, and labor is weaker than expected, the hawkish case becomes more fragile.

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What This Means For Markets

For markets, the jobs data cuts both ways. On one hand, weaker jobs can raise concerns about growth. If the labor market is deteriorating too quickly, that can become a recession-risk story, which would not be great for risk assets. On the other hand, if jobs soften just enough to take pressure off the Fed while inflation also cools because of lower oil, that can be supportive. That is the balance markets are trying to price right now. Stocks have already recovered strongly, with the S&P only about 1% from all-time highs, the Dow setting fresh highs, and the Nasdaq less than 5% from all-time highs despite still lagging a bit. Crypto is also catching a relief rally, helped in part by AI stocks cooling off and potentially freeing up capital for other risk assets. But the bigger macro point is that rate pressure may start easing if the data continues in this direction. The 10-year yield was still elevated around 4.52, even though oil had already returned near pre-war levels. If inflation data starts reflecting lower energy prices and jobs continue to weaken, yields may eventually have to catch down too.

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Bottom Line

The labor market may not be as strong as the Fed’s hawkish argument requires. ADP at 98,000, BLS at 57,000, and 74,000 jobs revised away from prior months is not a picture of overheating. It is a picture of a labor market that may be losing momentum, with the possibility that future QCEW revisions make it look even weaker. That matters because the Fed’s job is getting more complicated. Oil has cooled, inflation pressure may ease with a lag, and the labor market is no longer giving a clean green light for tighter policy. If that continues, it becomes harder to argue for more hikes and easier to see why Warsh may simply choose to wait. The market still has to get through the Fed minutes, the next inflation reports, and more labor data. But from where things stand now, the jobs market is starting to look less like a reason to hike and more like a reason for the Fed to be careful.