Fed Rate Cut Bets Fade as Jobs Report Reinforces Labor Market Resilience

The U.S. labor market defied expectations in April 2025, adding 177,000 jobs—a figure that outpaced economists’ forecasts of 133,000—even as revisions to prior months’ data trimmed February and March gains by 92,000. This robust performance, coupled with a stable 4.2% unemployment rate, has led traders to sharply reduce bets on a Federal Reserve rate cut by the June meeting. According to the CME FedWatch Tool, the probability of easing by June 18 dropped to 50.1%, down from 58.2% before the report, while the likelihood of a May hold surged to 99%.

The Jobs Report: Strength Amid Structural Challenges

The headline gains were driven by sectors such as health care (+51,000), transportation and warehousing (+29,000), and financial activities (+14,000), though federal government employment fell by 9,000—a 26,000 decline since January. While the unemployment rate held steady, long-term unemployment (27+ weeks) surged by 179,000 to 1.7 million, accounting for 23.5% of all jobless individuals—a worrying sign of lingering labor market inefficiencies.

Wage growth also offered a mixed picture: average hourly earnings rose just 0.2% month-over-month to $36.06, with annual growth at 3.8%. This muted pace suggests subdued inflation pressures but also reflects stagnant income for many households.

Fed Policy: Patience, Not Panic

The April report has bolstered the Fed’s “wait-and-see” stance. Chair Jerome Powell emphasized that the central bank would remain “data-dependent,” noting the labor market’s resilience even as inflation remains above the 2% target. The CME FedWatch data underscores this cautious approach: traders now assign only a 46% chance of a June rate cut, down from 55% the day before the report.

Analysts caution, however, that the Fed faces a balancing act. Goldman Sachs’ Lindsay Rosner argues that while the April data reduces urgency for immediate easing, risks like President Trump’s trade policies could force a pivot later this year. “The Fed will wait for clear cracks in the labor market before cutting rates,” she said.

Sector-Specific Risks and Opportunities

Investors should monitor sector divergences closely. The health care sector, which added 51,000 jobs, reflects ongoing demand for services amid an aging population, while transportation and warehousing gains may be temporary, tied to pre-tariff stockpiling. Conversely, the federal government’s job cuts—part of broader efficiency initiatives—signal sector-specific headwinds.

Meanwhile, the long-term unemployment crisis (now at pandemic-era highs) poses a systemic risk. A 23.5% share of jobless workers stuck in prolonged unemployment could eventually depress consumer spending, even if headline job figures remain strong.

Trade Policy’s Shadow

The report’s timing also matters: April data predated the full impact of Trump’s tariffs, which have yet to disrupt supply chains or hiring in key sectors like manufacturing and retail. Bankrate’s Mark Hamrick likens the situation to a “tsunami,” where delayed tariff effects could trigger layoffs in coming months.

Investors are pricing in this uncertainty. While the S&P 500 rose 0.8% post-report on labor market optimism, bond markets signaled caution: the yield on 10-year Treasuries climbed to 3.9%, reflecting reduced expectations for near-term Fed easing.

Conclusion: A Resilient Now, Uncertain Future

The April jobs report has temporarily calmed rate-cut expectations, with traders now assigning just a 50/50 chance of easing by June. However, the data masks deeper vulnerabilities: stagnant wage growth, rising long-term unemployment, and looming trade-related risks.

For investors, the Fed’s next moves hinge on whether these underlying weaknesses materialize. Sectors like financials (e.g., JPM, MS) could benefit from prolonged higher rates, while consumer discretionary stocks (e.g., AMZN, TSLA) face risks if tariff-driven inflation eats into spending.

The Fed’s June decision will likely depend on May’s jobs report and inflation data—highlighting the fragility of current expectations. As ClearBridge’s Jeff Schulze notes, April’s “calm” may be fleeting: “Markets are ignoring the storm clouds gathering ahead.”

In this environment, investors should prioritize defensive sectors, monitor FedWatch probabilities closely, and remain prepared for a potential shift in policy if the labor market’s cracks widen. The Fed’s patience may be tested sooner than traders now assume.