The Fed’s tightrope walk just became even more precarious, with the US labour market showing its first real signs of cooling after months of relentless job growth, as January non-farm payroll data revealed a rise in employment levels that fell short of expectations. However, revisions to the previous two months painted a more robust picture, with a combined upward adjustment of 100,000 jobs, indicating that hiring momentum in late 2024 was stronger than initially reported. The headline figures now suggest that while the labour market remains fundamentally solid, it is no longer overheated, marking a crucial development for policymakers as they assess whether to maintain their current tight monetary stance.

For the Federal Reserve, on the one hand, a gradual deceleration in job growth aligns with their goal of easing inflation without triggering a full-blown recession. Yet, any premature loosening of monetary policy could still reignite inflationary pressures, making the timing of future rate decisions critical. Consequently, Fed chair Powell has repeatedly emphasised the need to monitor labour market data closely, as wage growth and employment levels remain key factors influencing inflation dynamics.

However, adding complexity to this equation is a notable sectoral shift in employment trends, with data indicating that service-based industries, including healthcare, retail, and social assistance services, are driving much of the current job growth. Conversely, capital-intensive sectors such as mining, are beginning to slow, with layoffs and hiring freezes becoming more common. This divergence underscores a structural transformation in the US economy, where services are gaining prominence as traditional resource-driven industries face headwinds from rising interest rates and global supply chain disruptions.

Consequently, policymakers must strike a delicate balance between supporting growth in lagging sectors and ensuring that inflationary pressures from wage gains in the services industry do not spiral out of control. Furthermore, if the US economy continues to bifurcate along sectoral lines, with services thriving while resource-based industries stagnate, the Fed may face a more fragmented economic landscape that complicates the effectiveness of its policy tools. Interest rate adjustments, which have historically influenced both demand and investment across sectors, may now have an uneven impact, amplifying disparities in economic performance.