Fed Gets Support for Continued Rate Pause as Unemployment Rate Drops to 4.3%

The unemployment rate in the U.S. dropped last month to 4.3%, the lowest since August, in a sign of labor market stabilization that reduces the odds of a Federal Reserve rate cut next month.

The economy added a healthy 130,000 jobs in January, with gains occurring in health care, social assistance, and construction, according to the Labor Department's employment situation report released Wednesday.

The relatively strong jobs report is welcome news for workers, but may put upward pressure on mortgage rates as it undermines the chances of Fed rate cuts in the spring.

For the Fed, the falling unemployment rate will boost the case for "hawks" who are skeptical of further interest rate cuts, arguing that inflation remains a greater threat than weakness in the job market.

That hawkish contingent secured the 10-2 majority in January's meeting of the Federal Open Market Committee, and is expected to to continue holding rates steady when the panel meets next month.

On prediction marketplace Polymarket, the probability that the Fed will continue to stand pat in March rose to 87% following the jobs report, up from 81% earlier in the day.

"Markets are still predicting two rate cuts this year, but today’s better-than-expected report on current labor conditions means that, for now, the Fed is likely to remain on pause," says Realtor.com® senior economist Jake Krimmel.

However, recent labor market data isn't all good news, with the number of job openings shrinking and new claims for unemployment rising.

Monthly jobs numbers also continue to be revised downward consistently, offering a muddy picture of the health of the labor market.

As part of the annual benchmarking process, the new report revised the change in total nonfarm employment for 2025 sharply downward to a gain of 181,000 jobs, down from 584,000. Although the revision was large, it was widely expected and not as dire as some had predicted.

"The Fed is closely watching the labor market data. If conditions are indeed weakening, the Federal Reserve will almost certainly cut rates this year," says BrightMLS Chief Economist Lisa Sturtevant.

Markets now await the crucial Consumer Price Index report on Friday, which is expected to show inflation that is easing but still running above the Fed's 2% target.

Meanwhile, mortgage rates are expected to remain stable around current levels as the spring housing season kicks off in the coming weeks, with the 30-year fixed rate averaging 6.11% last week, according to Freddie Mac.

"For housing, today’s job numbers strengthen the case for cautious optimism heading into 2026," says Krimmel. "The labor market continues to look more resilient than robust, but stability in unemployment paired with solid real wage growth is what matters most heading into the spring homebuying season."

Affordability has improved slightly with mortgage rates remaining close to 6% and income gains improving purchasing power.

"After a subdued 2024 and 2025, the combination of labor market firmness and rate stability could help boost affordability and jump-start housing market activity heading into spring," says Krimmel.