NextFin News - U.S. hiring momentum began to evaporate weeks before the outbreak of the military conflict with Iran, according to labor market data released on Tuesday, complicating the Federal Reserve’s efforts to balance a cooling economy against war-induced inflationary pressures. The slowdown, which saw payroll growth decelerate significantly in February and early March, has reignited a fierce debate among investors over whether the central bank must pivot toward interest rate cuts to prevent a deeper recession, even as energy prices surge.
The labor market’s pre-war cooling is most visible in the leisure, hospitality, and retail sectors, where Goldman Sachs estimates that the subsequent oil price shock will suppress payroll growth by roughly 10,000 jobs per month through the end of 2026. With national gasoline prices climbing 26% year-over-year as of late March, the squeeze on discretionary spending is threatening to turn a controlled slowdown into a broader contraction. Goldman Sachs now projects the U.S. unemployment rate will climb to 4.6% by the third quarter, attributing half of that increase to the war’s impact and the other half to a labor market that was already failing to keep pace with supply.
Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, has emerged as a prominent voice calling for the Federal Reserve to proceed with rate cuts despite the geopolitical volatility. Rieder, known for his pragmatic and often data-dependent stance on monetary policy, argued that the Fed should "shrug off" speculation of rate hikes tied to the conflict. His position rests on the belief that the underlying economic softening—evidenced by the hiring slowdown—poses a greater long-term risk than the temporary price spikes caused by the war. However, Rieder’s dovish tilt is not yet the consensus on Wall Street, where many fear that U.S. President Trump’s trade policies and the current military engagement could entrench inflation.
The Federal Reserve itself remains deeply divided. Governor Christopher Waller recently urged caution, suggesting that supply disruptions related to the Middle East conflict could stoke inflation just as the impact of President Trump’s tariffs was beginning to fade. Waller’s stance reflects a "wait-and-see" approach that prioritizes price stability over immediate labor market support. This internal tension was echoed by Fed Chair Jerome Powell during a recent address at Harvard University, where he noted that while the oil shock might be temporary, it is too early to judge the war’s full impact on the domestic economy. The uncertainty has already sent the 10-year Treasury yield higher, pushing average mortgage rates to 6.38%, up from 5.98% in February.
The divergence in outlook is stark. While some analysts at Bank of America warn that the recovery could be "snuffed out" by the combination of high energy costs and slowing hiring, others point to the resilience of the broader service economy as a reason for the Fed to hold steady. The upcoming jobs report will be the ultimate arbiter of this debate. If payrolls show a second consecutive month of significant decline, the pressure on the Fed to provide relief will become nearly impossible to ignore, regardless of the geopolitical backdrop. For now, the market remains caught between the reality of a weakening labor force and the inflationary ghost of a new regional war.
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