What the surprisingly strong jobs report means for inflation and interest rates

U.S. employers hired far more workers than expected in January, a staggering flex of economic strength that refutes worries of a recession but could delay highly-anticipated interest rate cuts.

The economy added 353,000 jobs last month while the unemployment rate held steady at 3.7%, a historically low figure, according to data released by the U.S. Bureau of Labor Statistics on Friday.

The hiring came in well above the typical number of jobs added each month last year, setting the economy on a breakneck pace at the outset of 2024. In stunning fashion, employers added nearly twice as many workers last month as economists expected.

The fresh data marks the latest in a flurry of positive signs for the economy. The U.S. economy performed much better than expected at the end of last year, a report last week showed. Consumer sentiment, meanwhile, soared in January.

"So much for imminent recession fears," Mark Hamrick, senior economic analyst at Bankrate, told ABC News in a statement. "The U.S. economy has continued a surprisingly robust, sustained recovery after the pandemic."

The blockbuster performance, however, poses a challenge for the inflation fight taken up by policymakers at the Federal Reserve.

Inflation has fallen significantly from a peak reached last year, but it remains roughly a percentage point higher than the Fed's target rate of 2%.

In light of its progress in cooling inflation, the Fed expects to cut interest rates sometime this year. However, the hot economy could delay those interest cuts for several months, experts told ABC News on Friday.

Interest rate cuts would lower borrowing costs for consumers and businesses, potentially triggering a burst of economic activity through greater household spending and company investment.

But the Fed risks a rebound of inflation if it cuts interest rates too quickly, since stronger consumer demand could lead to an acceleration of price increases.

"When you combine strong jobs growth and consistent wage growth with falling inflation, the outlook for consumers over the first half of the year is encouraging," John Leer, chief economist at Morning Consult, told ABC News in a statement. "So encouraging that it feels less appropriate to cut interest rates before seeing some evidence of a moderation in economic activity.

Speaking in Washington, D.C., on Wednesday, Fed Chair Jerome Powell celebrated the steady decline of inflation over recent months and welcomed the robust hiring happening alongside it. However, he cautioned about the risks posed by an economy that runs too hot.

"We're not looking for a weaker labor market," Powell said. "We're looking for inflation to continue to come down, as it has been coming down for the last six months."

"We're not declaring victory at this point," he later added. "We think we have a ways to go."

In theory, when the Federal Reserve raises interest rates, such moves cool inflation by slowing the economy and easing demand. So far, however, the economy has largely defied the downward pressure imposed by the Fed.

On Wednesday, the Fed left its benchmark interest rate unchanged at an elevated level of between 5.25% and 5.5%. Interest rates may not come down anytime soon, economists told ABC News.

The stellar employment data on Friday "will likely encourage the Fed to hold pat as they feel little pressure to begin cutting rates," Daniel Zhao, lead economist at Glassdoor, told ABC News in a statement.

Hamrick, of Bankrate, agreed. "Job creation heated up in January, perhaps causing some Federal Reserve officials to break out in a sweat," he told ABC News in a statement.

The next opportunity for the Fed to cut interest rates will take place at a meeting in March. The following rate decision will arrive in May.