The U.S. Bureau of Labor Statistics reported that nonfarm payrolls dropped by 92,000 in February, sharply missing the consensus estimate of a 55,000 gain and reversing a prior increase of 130,000. The unemployment rate edged up to 4.4% (versus 4.3% expected and prior), while average hourly earnings rose 3.8% year-over-year, slightly above the 3.7% forecast. The disappointing data immediately shifted expectations for Federal Reserve monetary policy.
Jobs Data Takes a Sharp Turn, Reigniting Rate-Cut Bets
For the past two months, robust hiring and sticky inflation had dampened hopes for a Fed rate cut in 2026. But the unexpected contraction in February payrolls, plus a two-month net revision of just 69,000, validated Fed Governor Waller's earlier warning that the strong January numbers might be revised down. Speaking before the release, Waller urged markets to focus on the fresh data for a potential rethink of rate projections.
Cryptocurrencies rallied on the news, with Bitcoin jumping over 2% and Ethereum following suit. Traders now see the Fed refocusing on labor risks if the job market continues to soften. According to the CME FedWatch tool, the probability of a rate cut before June surged to 38% from under 20% before the data.
"With employment momentum slowing and inflation still sticky, the Fed will need to tread carefully moving forward," Waller noted. He added that sustained weak jobs data could bring rate cuts back onto the table.
Inflation and Geopolitical Risks Pinch Fed’s Room to Maneuver
Despite the weakening labor market, inflation remains persistent. Core CPI is still above 3%, and geopolitical tensions in the Middle East are pushing oil prices higher, feeding into headline inflation. This leaves the Fed in a tight spot: deteriorating employment calls for easing, but sticky inflation limits policy space. Economists expect the central bank to wait for more data, particularly the March CPI and payrolls reports, before making any move.
Markets now price less than a 50% chance of a cut before July. However, if job data continues to disappoint over the coming months, rate-cut expectations could accelerate. Investors are rotating from long-duration Treasuries and tech stocks into rate-sensitive assets, including cryptocurrencies.
Looking ahead, all eyes will be on the February CPI release on March 7 and subsequent employment reports. The interplay between U.S. economic data, global risks (Middle East conflict, trade policy), and Fed rhetoric will keep volatility high across asset classes, from stocks to digital assets.