Labor market stronger than expected in January

Overall, the January employment report was stronger than expected—hiring figures picked up to +130K (from +48K the prior month) and the unemployment rate fell by a tenth of a percentage point to 4.3%. The improvement in the unemployment rate was even more notable as the labor force participation rate (those with jobs or looking for jobs relative to the adult population) also increased by 0.1% to 62.5%.

The most important piece of this and the prior report is the fact that the unemployment rate has been moderately improving, even if hiring has been weak—evidence that supply and demand for labor remain in balance. That contrasts with how the labor market appeared in mid- to late-2025—when it seemed like demand was falling more sharply than supply. The current data makes hiring appear weak by historical standards, but the diminished supply of workers means the labor market as a whole is stable. That makes a good argument for the Fed to remain on hold for the time being.

One Tiny 800,000-Person Detail

The BLS completes a more comprehensive review of the payroll level each year and adjusts their estimate of the overall level of payroll employment. That has led to large adjustments in times of significant change—the global financial crisis, the post-pandemic years, and now the change in population and labor supply in 2026. Many expected it to be revised lower to incorporate the impacts of lower net international migration.

The latest estimate is that the labor market is 862,000 people (or 0.5%) smaller than previous estimates. Consensus forecasts expected downward revisions of 825,000 workers, so this is pretty close to what was anticipated.

From a policy perspective, though, the Fed cares much more about the flow of labor than the stock. Monthly net hiring and the balance in the labor market exhibited in the unemployment rate matter much more to policymakers.

Implications for the Fed

With interest rates now approaching most estimates of neutral—the level at which they’re not pushing inflation or unemployment in either direction—we’ve been expecting the Fed to use the unemployment rate as its principal guide for pacing any further cuts. If the labor market weakens, they’ll cut further and faster. If not, they’ll be able to cut with disinflation, as the economy digests the tariffs from 2025. That sets up our baseline forecast: two cuts, totaling 50 bps, in 2026. That would bring the federal funds target rate to the FOMC’s median estimate of neutral, which would effectively constitute a “soft landing.”