The February jobs report landed like a cold splash of water on anyone still holding out hope that the American labor market was finding its footing. The economy shed 92,000 jobs last month, a result almost nobody saw coming, and the unemployment rate nudged upward to 4.4 percent from 4.3 percent in January. But despite the disappointing numbers, the Federal Reserve is not expected to cut interest rates at its upcoming meeting, and the reason comes down to one word: oil.
The Iran war has sent oil prices sharply higher, injecting new inflationary pressure into an economy that was already navigating a delicate balancing act. For Fed officials, that combination of a weakening job market and a fresh inflation threat is about as uncomfortable as it gets.
What is behind the February numbers
The report was not without its complications. A labor strike among healthcare workers accounted for roughly 30,000 of the lost jobs, a figure that is widely expected to reverse in March once the dispute is resolved. Severe winter storms also weighed on hiring activity across several regions during the survey period.
Even so, the underlying trend is hard to dismiss. Job gains in December and January were revised downward by a combined 69,000, and the pace of hiring over recent months has slowed considerably compared to 2024 and most of 2025. Gains in sectors outside healthcare were not strong enough to offset the broader softness. When January and February are averaged together, the picture that emerges is one of essentially zero net job creation, a level that falls below the threshold needed to keep unemployment from rising over time.
That threshold has itself shifted. With birth rates low and immigration significantly curtailed under current administration policy, the number of jobs needed each month just to hold unemployment steady has dropped from around 100,000 to roughly 30,000. Even by that reduced standard, recent months are falling short.
Fed officials divided on what comes next
The jobs report has sharpened an already existing split within the Fed over the right path forward. On one side are officials who believe the softening labor market justifies moving toward lower rates and that the current stance of monetary policy is more restrictive than the moment calls for. The neutral rate, by some estimates, sits a full percentage point below where the benchmark federal funds rate currently stands at 3.5 to 3.75 percent.
On the other side are officials who see broad-based inflationary pressures as the more pressing concern. They argue that given three rate cuts already delivered last fall, policy is in a reasonable position and the Fed can afford to wait for clearer evidence that inflation is on a durable path back toward its 2 percent target. Some believe that evidence may not arrive until the second half of the year.
The oil shock complicates everything
Hovering over all of it is the Iran war and the spike in oil prices it has triggered. Energy costs have a way of working their way through the broader economy quickly, and officials are watching closely to see whether the price shock proves temporary or becomes something more persistent.
If oil prices stay elevated for an extended period, the inflationary effect could be significant enough to tie the Fed’s hands even as the job market continues to soften. That is the scenario some economists are now describing as a potential trap, where weakening employment would ordinarily call for rate cuts, but the risk of reigniting inflation makes the Fed reluctant to act.
A Fed in wait and see mode
For now, the prevailing view among Fed officials is that patience is the appropriate response. The labor market, while slowing, is not in freefall. Unemployment, though ticking higher, remains low by historical standards. And the full picture on oil prices and their inflationary impact will take time to come into focus.
The next few weeks of data will matter enormously. If hiring bounces back in March as the healthcare strike workers return and storm-related disruptions fade, some of the February alarm may subside. But if the weakness persists, the Fed may find its room to maneuver growing smaller by the month.
