Labor market strength steadies the economy despite consumer concerns about inflation from trade policies.
The U.S. economy remains solid, withstanding the repeated punches from three major hurricanes, union strikes during the autumn months, and winter storms and the wildfires more recently. U.S. payrolls rose 143,000 in January. When coupled with upward revisions from the prior two months, the six-month average is up to 177,700, mirroring the pre-COVID three-year monthly average of 177,000. A drop in unemployment rate to 4.0% combines with a bump in wages and labor participation to paint a robust labor market picture.
The Federal Reserve (Fed) is essentially in ‘wait & see’ mode in the near term. It kept the target range for the federal funds rate at 4.25% – 4.50%, still one full percentage point (1.000%) lower than September 2024. The Fed also held its policy of quantitative tightening with balance sheet runoff at a pace of $60 billion per month along with the monthly redemption cap of $25 billion for Treasury securities and $35 billion for mortgage‑backed securities (MBS). We maintain our view that the Fed will remain on hold for the next few meetings, unlike other major central banks, such as Canada and the European Central Bank, which are continuing to cut their benchmark rates.
The evolving tariff policy adds uncertainty and clouds decision-making for policymakers and businesses alike. Sweeping tariff increases on Canada and Mexico were delayed soon after being announced, while tariffs slapping an additional 10% on Chinese imports have begun. In response, China retaliated with targeted tariffs on U.S.-made goods, announced export controls on key minerals used to make high-tech products and notified several prominent U.S. companies of possible investigations and sanctions. Within days, the U.S. announced 25% tariffs on all imported steel and aluminum beginning in mid-March, which were met with calls for retaliation by trading partners, including Canada and Europe. These moves appear to be the start of a much longer process of reconfiguring global trade alliances. Stocks and bonds have been surprisingly resilient in the face of tariffs and trade issues.
The steady U.S. economy should provide the platform for growth to continue. At this point, the Fed has paused further rate cuts to digest incoming data and reassess conditions, which we feel is warranted given the uncertainty. While consumer confidence has taken a hit from concerns and trade and its impact on inflation, a steady and positive job market continues to place a strong floor under the U.S. economy.
