Robust May Payrolls Ease Cooling Economy Fears — But the Fed Likely to Hold Rates Longer

U.S. job creation in May came in much stronger than expected, easing concerns about a rapidly cooling labor market — but potentially giving the Federal Reserve more reason to keep interest rates elevated for longer.

The Bureau of Labor Statistics reported Friday that nonfarm payrolls rose by 139,000 in May, beating the muted estimate of 125,000. The unemployment rate held steady at 4.2%.

The solid report defied downbeat expectations, which had been weighed down by trade uncertainty and growing fears that tariffs might further dampen the economy. It followed two disappointing job indicators earlier this week. On Wednesday, the ADP private payrolls report was a major letdown, showing just 37,000 jobs added — far below the 110,000 forecast. That 5-sigma miss marked the weakest reading since March 2023. Then on Thursday, initial jobless claims rose to 247,000, the highest level of 2025 so far, suggesting the labor market may be starting to show signs of strain.

This stronger-than-expected payroll figure could give the Fed more reason to stay in wait-and-see mode. The next FOMC meeting is scheduled for June 17–18, and traders currently price in a 97% probability of no rate cut, with only 3% odds of a 25 basis point reduction. For the year, the Fed still expects to cut rates twice, at 25 basis points each.

In terms of sector performance, employment in health care continued to climb in May, adding 62,000 jobs — well above its 12-month average of 44,000 per month. Leisure and hospitality also remained strong, gaining 48,000 positions, including 30,000 in food services and drinking places. Over the past year, the sector had been averaging around 20,000 jobs per month.

Meanwhile, federal government employment declined by 22,000 in May and is now down by 59,000 since January. The drop may partly reflect restructuring efforts led by figures such as Elon Musk, whose push for efficiency under initiatives like the so-called DOGE Act has contributed to broader public sector layoffs.

While the robust payroll print may help alleviate recession fears in the near term, it also reinforces the Fed’s cautious stance — keeping markets on edge and potentially delaying the long-anticipated pivot to lower interest rates.