"Negative Non-Farm" Meets "Breaking $100 Oil Price"! The Federal Reserve is in big trouble

Known as the “New Federal Reserve Communications Agency,” renowned journalist Nick Timiraos wrote over the weekend that the Fed’s biggest long-standing concern has always been balancing the fight against inflation with protecting employment. Last Friday’s non-farm payroll report undoubtedly brought this dilemma even closer.

Just weeks ago, strong January employment data had raised expectations that the U.S. labor market was gradually stabilizing after months of uneven hiring. But last Friday’s non-farm report dashed those hopes—showing an unexpected drop of 92,000 non-farm jobs in February and the unemployment rate rising to 4.4%. These figures ended market optimism about employment stability and reignited concerns about a quiet deterioration in the labor market.

And for the U.S. economy, this couldn’t be a worse time. Federal Reserve policymakers are just beginning to respond to new energy and commodity price threats triggered by U.S. military actions against Iran—actions that have effectively shut down key global shipping lanes and could cause widespread energy production disruptions. On Monday during Asian trading hours, both WTI and Brent crude oil prices surged past $100 per barrel.

Chicago Fed President Goolsbee said last Friday in an interview, “We shouldn’t overinterpret a single month’s data, but the environment of rising inflation alongside rising unemployment is not good news for the central bank.”

Adding insult to injury

Timiraos pointed out that this latest non-farm report is a real blow to the White House. Over the past year, the administration has consistently claimed that deregulation, trade agreements, and tax cuts would usher in a new era of job growth.

But the reality is quite the opposite: slowing hiring growth, unpredictable tariffs, and current military actions against Iran are creating uncertainty that stalls recruitment.

Amid the Middle East conflict, U.S. inflation has remained above the Fed’s 2% target for five consecutive years, and the risk of renewed price increases has re-emerged. This jobs report, which should have paved the way for rate cuts, is now overshadowed by inflation risks.

Fed Governor Waller said last Friday morning in an interview, “Gasoline prices are going to spike. When Americans go to the pump, they’ll see it and be somewhat shocked.”

Timiraos noted that when the Fed faces both a weak labor market and inflation risks reemerging, options become very limited. Easing policy to protect jobs could accelerate already high inflation; maintaining current rates might weaken what appears to be a strong labor market.

Are we still going to blame “transitory” factors this time?

It’s worth noting that the Fed has traditionally viewed energy shocks as temporary disruptions and has chosen to observe rather than respond to price swings.

However, since 2020, the Fed has faced multiple supply shocks: the pandemic, Russia-Ukraine conflict, government tariffs, and now Iran’s military actions. If concerns about short-term price increases triggering a chain reaction persist, these factors could limit the Fed’s policy flexibility.

Minneapolis Fed President Kashkari said last Monday, “The current situation could replay the shadow of the Russia-Ukraine conflict.” He referenced the Fed’s embarrassing misjudgment in 2021, when it considered inflation spikes as temporary. “If this evolves into a global commodity shock, are we going to do ‘Transitory Inflation 2.0’ again?”

Goolsbee also expressed concern that continuous shocks could erode consumer and business confidence in the Fed’s ability to control inflation. “Expectations collapsing is a bit like sunburn,” he said. “Once it happens, you’ll regret not applying sunscreen.”

Internal divisions within the Fed may intensify

Looking at market reactions last Friday, the bond market’s response to the slowdown in job growth was muted—benchmark 10-year Treasury yields barely changed—indicating investors believe that, amid worsening inflation prospects, the Fed is unlikely to take aggressive (easing) measures.

Some analysts warn that the headline employment data was pressured by healthcare strikes, suggesting the situation might not be as bad as it seems. But even excluding this factor, weak hiring over recent months indicates that soft employment is neither a new nor a localized issue.

Revisions to December employment data also suggest the labor market is maintaining a peculiar balance from last summer: weak demand for labor offset by sluggish growth in the available labor pool, masking the true situation.

Timiraos believes that Fed officials are likely to remain cautious for now. Although Chair Powell pushed for three rate cuts late last year, internal debate within the FOMC has grown more intense at each meeting. Officials have made it clear that they do not plan to rush rate adjustments later this month, and that even troubling monthly data is unlikely to change this stance.

He also pointed out that if unemployment continues to rise in the coming months, the Fed might indeed start cutting rates mid-year. But other officials may oppose this. They have noted that before Iran’s conflict added new pressure on energy prices, inflation momentum had already stalled.

The Fed’s preferred inflation indicator—the core PCE price index—will be released this week, with January’s inflation expected to have increased. Timiraos said this serves as a reminder: the Fed’s inflation challenge didn’t start with the Strait of Hormuz blockade, and it may not end just because the Strait reopens.