• The unemployment rate rose to 3.9% in February, its highest since January 2022, as high interest rates dragged on the economy.
  • Wages grew at the slowest rate in two years in another sign that the upper hand workers have had in the job market is slipping.
  • Slower job growth could encourage officials at the Federal Reserve to lower its benchmark interest rate sooner rather than later, hoping to avoid a recession and mass layoffs.

The U.S. job market is slowing down—but not crashing—as the friction of high interest rates drags on the economy’s momentum.

The unemployment rate edged up to 3.9% from 3.7%, hitting its highest since January 2022, the Bureau of Labor Statistics said Friday. And in a somewhat mixed signal, U.S. employers added 275,000 jobs in February, up from the downwardly revised 229,000 the month before. Both the hiring figures and the unemployment rate were higher than what forecasters had expected, according to a survey of economists by Dow Jones Newswires and the Wall Street Journal.1

In another sign of a slowdown, average hourly earnings grew 0.1%, the slowest wage growth since February 2022. And downward revisions reduced job gains from the previous two months by 167,000.

The Federal Reserve’s campaign of anti-inflation interest rate hikes—which has set the Fed’s benchmark fed funds rate at a 23-year high and held it there since July—has pushed up borrowing costs for all kinds of loans. While the economy has kept chugging along against that headwind, avoiding a long-predicted recession, the latest jobs report indicates it is taking a toll on the roaring job market.

Officials at the Fed have said they are closely watching data such as Friday’s jobs report for signs that inflation is on a sustained downward trajectory. Policymakers have feared that rapid wage growth could fuel a cycle of pay and price hikes and drive up inflation, so rapid hiring and high salary growth raise the chances that the Fed will keep interest rates higher for longer.

On the other hand, they’re also looking for signs that cracks are appearing in the economy, such as a surge in layoffs, which could push them to cut rates sooner. The Fed is trying to balance the risks of inflation flaring up again versus causing a recession, and data such as Friday’s jobs report helps show whether the economy is on the path to a “soft landing,” rather than a crash, from the high inflation that flared up as the pandemic faded in 2021.

“The employment report does not change the view that the FOMC will be patient in raising rates,” Kathy Bostjancic, chief economist at Nationwide, said in a commentary. “It still keeps on the table a start to the rate cutting process at the May FOMC meeting, but most likely Fed officials wait until at least the June policy meeting before beginning to lower rates.”

The uptick in unemployment made an earlier rate cut more likely, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data, with the chances of a May rate cut rising to 30.4% from 26.6% before the report.2

Update and correction, March 8, 2024: This story was updated after publication to add comments from an economist. Also corrects the description of the average hourly earnings statistic.

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