“Fed’s Mouthpiece”: The labor market is entering a new mode, as the Federal Reserve’s hands and feet are being locked down by the fires of war.

Ask AI · How a New Labor Market Model Challenges the Fed’s Balancing Act

The U.S. job market delivered another impressive performance in March. However, with inflation and the economy being squeezed from both sides, the Federal Reserve finds itself in a “dilemma.”

Nick Timiraos of The Wall Street Journal—known as the “Fed’s loudspeaker”—pointed out that the March employment report once again reminded people why so many economists have been reluctant to call the U.S. labor market bearish: even after four years of a chain of shocks, it has still managed to hold its ground.** The real question now is: how long can that resilience last?**

Over the past few years, the U.S. job market has weathered the most aggressive interest-rate hikes in decades, a regional banking crisis, and tariff shocks. Each time, it teetered on the edge but never fully collapsed. Now, the latest massive upheaval stemming from the Iran war—hitting energy prices and global supply chains—will again test the limits of that staying power.

In March this year, U.S. employers added 178k jobs, reversing the slump from February’s steep decline of 133k jobs (a larger drop than previously expected) in one fell swoop. The unemployment rate also erased February’s increase, edging down slightly to 4.3%. Still, some details are far less encouraging: wage growth for ordinary workers slowed to the weakest year-over-year pace since the post-pandemic restart.

Timiraos noted that averaging these two volatile months provides a clearer view of the underlying trend: this shows that the monthly average new job gains are only 225,000. While that pace would have sounded the alarm two years ago in absolute terms, today the reason the labor market can still hold steady is largely because immigration has fallen sharply and more people are retiring. This means economists now believe that, compared with the past, the economy needs far fewer net job gains to keep the job market’s basic foundation intact.

Heading into 2026, economists had expected the labor market slowdown to have already bottomed out. The strong core data in March may be a brief glimpse of that hope. But after the blockade of the Strait of Hormuz thoroughly disrupted global energy supply chains, labor economist Guy Berger said bluntly: “Right now, nobody is expecting the economy to accelerate again.”

The labor market has been adjusting to major changes in immigration policy, which directly reduced the size of the potential labor force. Companies have been slow and deliberate when it comes to hiring, yet extremely hesitant when it comes to layoffs. This is an employment market consistent with full employment, but it is characterized by very low growth and a lack of vitality—leaving it with little buffer space to absorb shocks.

Fed officials have been trying to figure out what it actually means if the economy only needs far fewer jobs to keep the unemployment rate steady. “Getting people to believe that an employment-zero-growth economy is equivalent to full employment is not easy,” San Francisco Fed President Daly wrote in a blog post last Friday. She said that restrictions on the inflow of new workers mean the economy’s ‘speed limit’ is lower, and the risk of misjudging—whether setting interest rates too low or too high—is being amplified again and again.

Timiraos said that the high uncertainty brought by the war has quietly changed the Fed officials’ talking points about the interest-rate path. Before the conflict broke out, many policymakers still expected rate cuts to resume this year. Now, more and more people are implying that the Fed could hold steady indefinitely.

The most optimistic scenario is that the war and the supply-chain upheaval it triggers will not last long, limiting the damage to hiring. The most pessimistic scenario is that a protracted conflict will spread a price shock wave rapidly into fertilizer, industrial chemicals, and semiconductor production. Higher costs facing businesses and consumers could substantially squeeze the consumer spending that supports new hiring.

Unlike the energy shock caused by the 2022 Russia-Ukraine conflict, consumers today have already drained most of their savings, and wage growth is also hitting the brakes. That means households have less and less room to absorb high prices without tightening their belts. Once they truly start cutting back, companies that have been “feeding on consumption” will have no choice but to reduce employee hours and even lay off workers outright.

Citi’s chief economist Nathan Sheets said that because people in the bottom 60% of income earners spend most of their budgets on necessities, as long as they keep their jobs, they will continue spending. He acknowledged: “What really brings them down is a sharp cooling in the labor market.”

Today, all kinds of costs are starting to stack up, one after another. Fiscal stimulus measures that were supposed to support economic growth this spring and, in turn, sustain hiring now have to race against persistently surging oil prices. Economists at the St. Louis Fed estimate that if gasoline prices stay at their current high levels, the fuel-price increases over the past month mean consumers have to spend a large additional amount of money each quarter—an amount equivalent to offsetting 10% to 50% of last year’s Trump tax-cut benefit.

Every dollar added to a car’s gas tank means that money cannot go into the pockets of restaurants, retailers, and all kinds of services. Those industries, in turn, account for roughly half of U.S. employment. At the same time, rising bond yields have pushed mortgage rates back from 6% to around 6.5%, making the hope of boosting construction-sector employment by stimulating the housing market even dimmer.

Timiraos said there is reason to believe the labor market can absorb this blow again—just as it has handled past crises. Sheets believes that years of being battered and tempered have made companies leaner and more adaptable, like an athlete in peak training form, rather than someone who is exhausted and relying purely on “luck.”

The U.S. economy’s dependence on oil is far less than it used to be. But Skanda Amarnath, executive director of the policy think tank Employ America, said that this does not mean the coming storm will not hurt, nor does it mean that strong resilience equals absolute strength. Amarnath described the labor market that will face this shock as one that is “lying flat”—that is, it may look listless for a period of time, but it will never fully fall apart.

Berger lamented: “My experiences in 2022, 2023, 2024, and 2025 have made me realize that conditions deteriorate at an extremely slow pace—and it is by no means impossible for things to keep worsening.”

Timiraos concluded that the Fed, tasked with both maintaining the health of the labor market and controlling inflation, is confronting a dilemma that it has never faced when hit by shocks in the past. The Fed has spent a full five years trying to convince the public that inflation above target is temporary, and every new shock makes that story increasingly harder to reconcile with reality.** How this play ultimately ends will depend largely on how long the war lasts.**

Daleep Singh, chief global economist at PGIM, said a ceasefire agreement that preserves outcomes across the board could bring oil prices back into the $80 to $100 per barrel range. But he warned that if the conflict escalates, the Fed’s hands and feet will be fully tied—forcing it to deal, for a long time after the fighting subsides, with supply-chain disruptions that drag on economic growth. That would make it even harder for the Fed to buffer any potential economic slowdown through rate cuts.