Rate Expectations

The January jobs report surprised analysts by posting payroll growth more than twice the consensus and pushing the unemployment rate down to 4.3 percent. Participation rose, indicating a broader pool of job seekers entering the market. This robust performance suggests the U.S. labor market entered 2026 with momentum, countering earlier narratives of a soft landing. While the gains were concentrated in a few sectors, the data gave investors confidence that employment strength will support consumer spending and reduce immediate recession risks.

Federal Reserve policymakers now face a tighter timeline for monetary easing. Market pricing has shifted the first rate cut from June to July, and many analysts view it as potentially the final reduction this year. The upcoming CPI release on Friday the 13th will be a critical test; higher‑than‑expected inflation could embolden the two hawkish Fed members who have already warned against any further easing. Consequently, the Fed’s focus is likely to move from labor‑market stability to price stability, keeping interest‑rate decisions under close scrutiny.

The Congressional Budget Office’s latest outlook adds fiscal pressure to the mix. It projects cumulative deficits 6 percent higher than a year ago, deepening the federal debt by roughly $1 trillion over the next decade, while assuming 10‑year Treasury yields around 4.3 percent—levels already among the world’s highest. These assumptions contrast sharply with the White House’s more optimistic growth forecasts, suggesting that bond yields will stay elevated and that the United States is unlikely to become the low‑rate leader globally. Investors therefore must weigh tighter monetary policy against a widening fiscal gap.