Fed Rate Cut Bets Rise After Weak Jobs Data

New signs of labor weakness and oil-driven inflation concerns may saddle U.S. Federal Reserve officials with a choice they'd hoped to avoid between ensuring prices remain contained or keeping a possibly wobbly job market on track.

As oil prices pushed $90 a barrel and U.S. gas prices jumped from $3 to $3.32 in a week, February hiring stalled, with U.S. employers cutting 92,000 jobs and gains in prior months revised lower.

The February jobs numbers were driven lower by labor strikes in the health sector and the ongoing downsizing of the federal government, but the report still undermined hope that the U.S. hiring was about to hit a more robust stride.

Combined, the dynamics — a war and rising commodity costs and weaker hiring — rekindle for the Fed the concerns about "stagflation" that policymakers thought they had laid to rest.

The Fed is expected to hold rates steady at its upcoming March 17-18 meeting, but may now have a broader discussion looming at a moment when key supply chain risks are again on the table.

Echoes of the pandemic era may be hard not to hear, when the difficulty of supply chain disruptions in an integrated global economy became apparent, with no predictable timeline for how long the flow of oil may be disrupted or how high the price may go.

Following the jobs report investors boosted bets the Fed would cut short-term borrowing costs in June, but the outcome may now hinge on how policymakers decide to balance the fresh risks to the economy that could now mean both higher prices and weaker growth.

In comments on Bloomberg Television, Fed Governor Christopher Waller said he viewed the rise in oil prices as "more like a one-off event" that would not require a Fed response, but also acknowledged the uncertainties if the conflict persists and oil prices keep rising.

"If it's unwound in ... a couple of weeks or even two months, it's not going to be a big factor down the road," Waller said. "If it becomes more permanent ... Then it'll start bleeding through to other parts of the economy."

But policymakers are also likely to put new weight on the labor market after the disappointing February numbers.

Following larger than expected employment gains in January, Waller had said he was prepared to hold off advocating further rate cuts if the February jobs number was also strong.

"If the labor market continues to go weak ... If we get a bad number ... the question is why are you just sitting on your hands" and not trying to bolster the job market with rate cuts, Waller said.

The tension for some Fed officials was already coming into view, with inflation about a percentage point above target with new pressures on the horizon.

"The hopes that the labor market was steadying -- maybe that was too much," San Francisco Fed president Mary Daly said on CNBC.

"But we also have inflation printing above target and oil prices rising. How long they last, we don't know, but both of our goals are risks now and we need to keep our eye on both."