What more could the Fed want? The Bureau of Labor Statistics (BLS) recently reported that the U.S. added 130,000 jobs in January, well above the 75,000 net job additions economists had expected. The agency also announced that the Consumer Price Index (CPI) in January was 2.4%, down 0.3% from the previous month and below the 2.5% economists had anticipated.
Kevin Hassett, director of the National Economic Council, believes that this double dose of good news gives the Fed ample reasons to cut interest rates further, which would be positive for U.S. businesses. Surprisingly, though, the S&P 500 (^GSPC 1.52%) declined after the BLS reports. Why are investors worried?
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It's complicated
The dynamics are more complicated than they might seem at first glance. For one thing, the Fed doesn't use the CPI as its primary inflation metric. Instead, it focuses more on the personal consumption expenditures (PCE) price index. The U.S. Commerce Department won't announce this number until Feb. 20, 2026.
Even if the Fed only looked at the CPI, inflation would still be above its 2% target. Also, higher-than-expected job numbers could make it less, rather than more, likely that the Fed will cut interest rates.
To make things more complicated, the latest employment numbers might not be all that reliable. Jobs reports for January can reflect some post-holiday seasonality. Also, most of the job gains came in one sector -- healthcare. That doesn't seem to indicate broad-based strength in the jobs market.
In addition, there's a good chance that the numbers could be revised downward in the future. The previous estimate for jobs added in 2025 was 584,000, but that figure was revised to only 181,000 in the recent BLS report. On a non-seasonally adjusted basis, the downward revision was 862,000. This is the second-biggest downward revision by the BLS since 1979.
Deeper fears
I think investors' fears go deeper than the complicated dynamics of the positive BLS reports released last week, though. Artificial intelligence (AI) is part of the problem. Software stocks have plunged amid concerns about AI disruption. So have transportation stocks and some commercial real estate stocks.
These sell-offs don't reflect concerns about what the Fed will or won't do. Instead, they seem to point to a possible fundamental shift in the growth prospects of large parts of the economy, driven by AI.
Another issue is one I suspect some Fed members are worried about: a potential resurgence in inflation. The "One, Big Beautiful Bill Act" will pump $3.4 trillion of debt-funded stimulus into the U.S. economy over the next 10 years. President Trump is pushing hard for the Fed to cut interest rates. But further rate cuts during a period of economic stimulus could fan the flames of inflation.
The president also continues to use his self-proclaimed favorite word, "tariffs," frequently. Trump has threatened 25% tariffs on imports from any country trading with Iran. In January, he threatened to impose 100% tariffs on Canadian imports to the U.S. if Canada struck a trade deal with China.
Worse than uncertainty?
I have long maintained that the thing investors hate the most is uncertainty. However, I think there is one thing that they hate even more -- instability. Could instability be the best description of where things stand right now? Maybe.
The latest BLS jobs numbers are suspect given the massive downward revision to the 2025 figures. As some have predicted for quite a while, AI could be beginning to significantly impact entire sectors of the economy.
None of this means that the stock market will necessarily sink in 2026. The adage that stocks "climb a wall of worry" is often true. However, there is considerable uncertainty and perhaps some signs of instability. The proverbial wall the stock market must climb this year could be a higher one than in the past.
