Blockbuster Jobs Report Backs Up Fed’s Patience as It Waits to Cut Rates

Federal Reserve officials left interest rates unchanged this week and signaled that their next move was likely to be a cut — but they also suggested that they were in no hurry to make that change. Friday’s jobs data is likely to reinforce their cautious stance.

Employers hired much more rapidly than expected in January, and average hourly earnings climbed 4.5 percent over the year, the fastest pace since September and a reversal after months of cooling.

Jerome H. Powell, the Fed chair, made it clear during his news conference on Wednesday that the central bank was not bent on keeping interest rates high just to slow down the labor market, but the report suggested that the economy might not be cooling quite as much as policymakers had expected.

Given that continued strength, the Fed is unlikely to feel pressure to cut interest rates at its next meeting on March 19-20. Policymakers do not want to hold borrowing costs too high for too long and risk a painful recession, but the data suggests that a possible downturn remains very much at bay. 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 think it will cool the economy as it trickles through financial markets and weighs on mortgage, credit card and business borrowing.

The Fed’s goal in trying to cool the economy is to rein in inflation, and price increases have been receding: Over the past six months, inflation data have been close to normal.

But that has come without much of a broader economic slowdown. Job openings have come down and the housing market slowed in reaction to higher rates, but both hiring and consumer spending have remained surprisingly resilient.

Mr. Powell suggested this week that the Fed would like to see more evidence that inflation was coming under control before it began to cut interest rates and that it was unlikely to have enough data to feel confident in that before the March meeting.

Markets sharply dialed back the chances of a rate cut at that gathering after the January jobs data.

Notably, Mr. Powell said the Fed was willing to be patient — rather than wary and reactive — as it waited for wage growth to slow to normal levels. Some economists think that the relatively quick pace of wage gains could prevent inflation from stabilizing at 2 percent over time, if it continued.

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

He added that wage increases “probably will take a couple of years to get all the way back, and that’s OK.”

The strong January wage number did come in part as employees worked fewer hours — which meant that earnings per hour were measured against a smaller base, potentially inflating them. Given that, the big monthly pop should be taken “with a large grain of salt,” wrote Omair Sharif, founder of Inflation Insights.

But other signs of strength in the report were fairly broad-based.

Given Mr. Powell’s comments — and how much inflation had come down in recent months — Kathy Bostjancic, the chief economist at Nationwide, said the Fed could still proceed with rate cuts this year even with a very strong labor market. She expects a move lower in May or June.

“It seems like inflation is the primary driver,” Ms. Bostjancic said, versus the strength in the fresh jobs numbers. “This should have a very modest impact on the timing — and even the degree — of rate cuts.”