US Adds 172,000 Jobs in May as Labor Market Rebounds

The U.S. economy added 172,000 jobs in May, more than double what economists had predicted, signaling a robust rebound in the labor market after an anemic 2025. The stronger-than-expected report, released Friday by the Bureau of Labor Statistics, kept the unemployment rate steady at 4.3% but triggered a sharp sell-off on Wall Street as investors recalibrated expectations for interest rate policy under new Federal Reserve Chair Kevin Warsh.

A Labor Market Finding Its Footing

After a “miserable” 2025 in which monthly job growth averaged fewer than 10,000 positions, the labor market has staged a decisive comeback. Over the last three months, employers have added an average of 188,000 jobs each month, according to NPR. Job gains for March and April were revised upward by a combined 93,000, further underscoring the turnaround.

“The labor market is finding its footing,” Scott Horsley of NPR reported.

Leisure and hospitality led the hiring surge, adding 70,000 jobs in May — including 48,000 in restaurants and bars alone — as businesses prepared for the summer travel season. Healthcare contributed another 35,000 jobs, while local government and construction also boosted payrolls. The financial sector bucked the trend, cutting 22,000 jobs as banks and insurance companies reduced headcount.

Wall Street Sells Off on Rate Hike Fears

While stronger hiring is typically welcomed by markets, the May report landed with a jolt. The S&P 500 fell 2.6% to close near 7,384, while the tech-heavy Nasdaq Composite plunged 4.2%, losing more than 1,100 points in its worst single-day drop in over a year. The Dow Jones Industrial Average gave back nearly 700 points, according to USA Today.

The sell-off was driven by growing conviction that the Federal Reserve may need to raise interest rates rather than cut them. The benchmark 10-year Treasury yield rose 7 basis points to near 4.551%. Semiconductor stocks were hit particularly hard, with two major chip ETFs each falling more than 10%.

A Policy Dilemma for the New Fed Chair

The jobs report lands at a pivotal moment for the central bank. Kevin Warsh, who took over from Jerome Powell in mid-May, is preparing for his debut Federal Open Market Committee meeting on June 16-17. President Trump and Treasury Secretary Scott Bessent have signaled they expect Warsh to be receptive to rate cuts. But the data is pushing in the opposite direction.

“We’ve got a Warsh Fed now. It’s a new day at the Fed,” Bessent said at a news conference last week, as reported by The Guardian. “I believe that he will do the right thing to balance inflation and growth.”

Yet multiple Fed officials have shifted toward a hawkish stance. Fed Governor Christopher Waller, who previously supported rate cuts, recently said he “can no longer rule out rate hikes further down the road if inflation does not abate soon,” according to Reuters. Cleveland Fed President Beth Hammack said the economy is at “full employment” and that “it may soon be appropriate to act.”

Markets now price in roughly 70% odds of a rate hike by December, up from about 50% before the jobs report.

Inflation Remains Stubbornly High

The central bank’s challenge is compounded by persistent inflation, now running at 3.8% year-over-year — well above the Fed’s 2% target and on track for a sixth straight year above that level. The Iran war, now in its fourth month, has been a primary driver. The disruption of the Strait of Hormuz sent oil prices soaring, and while a temporary ceasefire has been in place since April 8, the strait remains partially impeded.

“Inflation is being nudged higher by a broader array of forces than just the Iran war,” Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research, told USA Today. “Look for prices to stay higher for longer.”

The International Monetary Fund now expects inflation won’t return to the Fed’s 2% target until the end of 2027, pushed back from mid-2027 due to the effects of the conflict, as AP News reported.

What to Watch Next

Several key data points and events will shape the outlook in the weeks ahead. The Labor Department is set to release May inflation data next week, providing the Fed with critical information ahead of its June 16-17 meeting. The trajectory of the Iran war and any progress on reopening the Strait of Hormuz will also be closely watched, as will summer hiring trends.

For Warsh, who argued during his nomination that AI-driven productivity gains could allow rates to fall, the reality of a strengthening labor market and sticky inflation presents an immediate test. With U.S. midterm elections in November that may hinge on the state of the economy, the political stakes could hardly be higher.