May Jobs Report Shows Strong Hiring, but a Fed Rate Hike Isn’t a Done Deal

Hiring across much of the US economy picked up speed, with the May jobs report showing gains well above expectations. While the employment data provided evidence of a labor market that has recovered from a swoon at the start of the year, economists say moderate job growth means it isn’t overheating and adding to inflation pressures.

Economists said this landscape should cement the Federal Reserve’s position of keeping interest rates steady this month and in the coming months. However, with an energy-driven rise in inflation, the jobs report has bond traders seeing a rate hike this year as more likely than not.

The US economy added 172,000 jobs in May, according to the latest report from the Bureau of Labor Statistics. The unemployment rate held steady at 4.3% from April.

Nonfarm payroll employment had been forecast to show an increase of 105,000, down from the 115,000 increase initially reported in April, according to FactSet. That April gain has since been revised up to 179,000. Meanwhile, the unemployment rate had been forecast to remain steady at 4.3%. “While the payroll figures show a job market that is strengthening mightily, tepid wage growth and an unchanged unemployment rate suggest merely that it has ceased weakening,” says Preston Caldwell, senior US economist at Morningstar.

May Jobs Report Key Stats

• Total nonfarm payrolls rose by 172,000 after rising by 179,000 in April.
• The unemployment rate held steady at 4.3% in May from April.
• In May, average hourly wages rose by 12 cents, or 0.3%, to $37.53.

With the May report, the three-month moving average for job creation—which provides a clearer picture of the trend than one month’s data—more than doubled to 188,333 from 79,000 in April. That equates to employment growth of a 1.4% annualized rate over the past three months, the strongest since March 2024, Caldwell says.

The May report also showed a broadening of job growth from recent months, when gains had largely been concentrated in healthcare and education. Last month’s hiring also improved in leisure and hospitality, as well as local government, the BLS reported. “Job growth has accelerated across nearly every major industry category,” Caldwell says. Payroll growth numbers were revised up by 64,000 in April and 29,000 in March.

Still, there are pockets of weakness. “In white collar categories—finance, information, professional services, management, and administration—job growth is still comparatively weak at negative 0.1% growth in the past three months,” Caldwell says. “But that’s better than the 0.8% decline in the prior three months, suggesting that AI’s bite is not worsening, for now.”

Unemployment Rate Unchanged

While the unemployment rate was steady, some economists highlighted the lack of movement in the jobless rate despite the strong gains in hiring. “The labor market still appears resilient, but not as if it’s reaccelerating, and the unemployment rate remains essentially stuck around 4.3%,” writes Adam Schickling, senior economist at Vanguard. “What’s notable is that unemployment is increasingly concentrated among younger, more educated workers who are staying in the labor force, and that’s one reason it may be harder for the rate to move meaningfully lower from here,” he says.

Wage Growth Implies Job Market Stability, but Not Strength

Another focus was the 0.32% increase in average hourly earnings in May, which followed a 0.16% increase in April. “Softer wage increases have been the norm in recent months, and indeed, the year-over-year rate for May fell from the prior month, albeit slightly,” writes Natixis US economist Christopher Hodge.

“The lack of a reacceleration of wage growth in recent months points to a labor market that is stable but not hot. This distinction matters. A faltering jobs market requires policymakers to consider coming to the rescue with cuts—clearly not the case now. A job market that is thriving and increasingly tighter might require hikes, but we don’t think we are there yet, either," Hodge says.

Job-Market Growth Increases Likelihood of Interest-Rate Hikes by Year-End

In the bond futures market, the jobs report encouraged predictions that the Fed will raise interest rates later this year. According to the CME FedWatch Tool, there is a 43% likelihood that the Fed will raise the federal-funds rate target by a quarter point from its current range of 3.50%-3.75% by December. The market is also assigning a more than 20% chance that the Fed will raise rates by a half point before the end of the year.

Coming into 2026, markets expected the Fed to be cutting rates. But the renewed inflation increase, fueled by the jump in energy prices caused by the Iran war, has changed the calculus.

However, many economists aren’t ready to call a rate hike a certainty. “The strong jobs numbers and stable unemployment rate increase the risk of a longer Fed pause, though we still view rate hikes as unlikely,” Goldman Sachs economists wrote Friday.

Morningstar’s Caldwell says the May jobs report is “not totally unambiguous” when it comes to the outlook for the Fed. “While the payroll figures show a job market that is strengthening mightily, tepid wage growth and an unchanged unemployment rate suggest merely that it has ceased weakening. Still, today’s data could tip the Fed to conceiving plans for a rate hike in 2026.”