The U.S. Labor Market Looks Rock Solid. The Odds of the Fed Cutting Interest Rates Before 2028 Are Now Slim to None

After a tough year in 2025, the U.S. labor market looks rock solid right now.

Nonfarm payrolls in May added a seasonally-adjusted 172,000 jobs, far ahead of economists’ estimates calling for 80,000 gains during the month.

Additionally, the unemployment rate held steady at 4.3%, while average hourly earnings increased 0.3% from the previous month, in line with estimates.

Meanwhile, the U.S. Bureau of Labor Statistics revised its estimates for March and April higher.

The jobs picture suggests the economy is holding up well. However, it also makes the odds of the Federal Reserve cutting interest rates before 2028 slim to none.

Image source: Getty Images.

Renewed strength in the labor market

Nonfarm payrolls have now added at least 160,000 jobs to the economy in four of the past five months, which is the strongest string of reports since 2024.

Even better, the gains seem to be broadening across job categories.

In recent months, the leading categories have been in healthcare and social assistance. These jobs aren’t necessarily indicative of economic expansion. They are more closely tied to demand and also have high churn.

US Nonfarm Payrolls MoM data by YCharts

In May, leisure and hospitality led all categories, adding 70,000 jobs, while local government added 55,000. Healthcare also remained strong, adding another 35,000 jobs.

On the downside, financial activities jobs declined by 22,000 and are now down 107,000 since peaking in May 2025.

“This is a labor market that is stronger than it was last year and is looking pretty darn solid, despite high energy prices and higher inflation generally,” PNC’s Chief Economist Gus Faucher said, according to CNBC. “There’s no indication that the labor market needs support.”

“The hiring recession is over. American firms are hiring again,” Navy Federal Credit Union’s Chief Economist Heather Long added. “This is a strong jobs report from every angle.”

Chances of a rate cut continue to plummet

One potential downside for investors is that a strong labor market may remove the need for the Fed to cut interest rates.

Inflation remains above the Fed’s 2% target, and many suspect it could increase as long as the conflict with Iran continues.

The longer the conflict goes on, the longer the Strait of Hormuz remains closed, stifling the passage of oil.

The case for the Fed to cut rested on a weakening labor market, which now seems to be rebounding nicely.

According to CME Group’s FedWatch tool, which estimates the probability of changes to the Fed’s overnight benchmark lending rate, the federal funds rate, based on 30-day federal funds futures, there is now a much higher likelihood of a rate hike than a cut.

According to FedWatch, the Fed is expected to keep rates steady until December, at which point the market assigns a nearly 43% chance of a quarter-point rate hike.

The Fed is then expected to leave rates at this level through 2027. Meanwhile, the probability of a rate cut is less than 5% until the very end of 2027. Keep in mind that these probabilities can change frequently, especially as new economic data is released.

But it’s going to be really hard for anyone at the Fed to justify a rate cut if the labor market looks solid and inflation remains elevated.

The Fed would not want to risk further igniting inflation in that scenario.

The next big clue on inflation and the rate picture will come next week, when the May Consumer Price Index reading is released.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.