Last week, financial markets were prepared for a story about AI displacing workers in the US labour market. Economists were drawing up scenarios for the US economy without any net job creation. And the Trump administration was getting ready for some ugly data to explain away. None of that happened.

The US economy created 130,000 jobs last month and an average of 30,000 roles a month in the year to January 2026. Unemployment fell for the second consecutive month to 4.3 per cent, just a touch above its 4.2 per cent rate in February last year. Even though there was the expected large downward revision to 2025 jobs growth, all the data was far better than expected.

The figures raise three questions. Whatever happened to the recent narrative on jobs? Is the US achieving a Eurozone-style “good place” for monetary policy? Or is it still facing something hotter and perhaps a bit more Australian?

The benefit of hindsight

Just after January’s Federal Open Market Committee meeting that held US interest rates in the 3.5 to 3.75 per cent range, Federal Reserve governor Christopher Waller justified his dissenting vote in favour of a rate cut by arguing it would “strengthen the labour market and guard against a deterioration that would be harder to address once it has begun”. He worried that the expected revision would leave US jobs growth at “zero. Zip. Nada.”

It was just one month’s data, but the emerging reality is that strong US GDP growth has been improving the country’s labour market, as we would expect. Pretty much all the data last week was positive and diminished the recent paradox of very strong activity figures alongside weak jobs numbers.

If you compare a series of representative US labour market indicators with their values in 2000 to 2019, as we have done on the FT’s Monetary Policy Radar and below in a chart, the jobs market looks normal — or even a bit stronger than normal.

Unemployment at 4.3 per cent puts it now back within the FOMC’s central tendency for the equilibrium rate. With joblessness falling to a level deemed normal, it is hard to assert that interest rates are obviously restrictive — and Fed officials are noticing. Lorrie Logan, Dallas Fed president and this year a voting FOMC member, was ahead of the game before the data came out last week, saying “our current stance of policy may be very close to neutral and providing little restraint on economic activity and inflation”.

The case for a more dovish interpretation of US labour market data now rests on cherry-picking, such as looking at private sector hiring rates or asserting that the equilibrium unemployment rate is way below the FOMC’s median estimate of 4.2 per cent.

Alternatively, advocates of a more dovish approach could take the financial market view that we are just about to see the destructive side of creative destruction, even though that is not yet showing up in the data. Or they could simply declare that the Phillips curve approach is misconceived, forecast stable low inflation and cut rates.

Turning European

For some time now, the European Central Bank has said it is in a “good place” because inflation in the bloc is stable, the Eurozone labour market has improved and there is little reason to raise or lower interest rates. It has achieved a soft landing, even if some parts of the single currency area, especially Germany, do not see it that way.

This story is also likely to play out in the US as the country moves towards on-track inflation and economic stability. (Though the US will have higher growth than the Eurozone because of its underlying dynamism, especially in the tech sector.)

CPI inflation is not quite back at 2 per cent and the last mile of disinflation in the US is proving difficult. But there is a good chance that the Fed will get back to its target. Nothing in the data suggests this is not a reasonably strong possibility.

With some better news from the jobs market last week, the soft landing story is stronger than it was. This would suggest that the neutral interest rate is closer to 3.5 to 4 per cent rather than the 3 per cent median that the FOMC currently believes. This equilibrium is also predicated on the Federal budget deficit remaining somewhere close to its current unsustainable 6 per cent level.

A warning from down under

It is important not to cherry-pick data to generate a narrative. But if I do just that in the chart below, you can see the striking similarity between US and Australian unemployment rates — and a warning from down under about inflation.

In short, Australia in 2023 and 2024 experienced disinflation while its unemployment rate was rising, almost mirroring the rise in US joblessness. The Australian labour market tightened earlier than that of the US and Australian inflation has jumped, rising close to 4 per cent.

Such was the abrupt change that the Reserve Bank of Australia became spooked and raised interest rates by a quarter point to 3.85 per cent in its February 3 meeting, citing “momentum in demand”, easing financial conditions and an unemployment rate “a little lower than expected”. Does that sound familiar?

There is also concern in Australia that the government’s budget deficit has risen to unsustainable levels. The IMF this week welcomed a planned medium-term fiscal consolidation — but Australia’s deficit is currently rising. Of course, the country’s expected budget deficit of around 3 per cent of GDP in 2025 and 2026 is less than half that of the US (which, as the Congressional Budget Office last week forecast, is expected to remain high for the next decade).

It is best not to assume the US in the future will look like Australia. Economies are different. But equally, the days in which the Fed cut interest rates to reflect potential downside risks to the US labour market seem to be over.

What I’ve been reading and watching

• Harvard University’s Jason Furman delivered a beautiful economic lecture on the FT’s opinion pages, showing that higher productivity growth generally does not mean lower inflation and rates.

• Staying in the US, Stephen Cecchetti and Kim Schoenholtz argue that Fed chair nominee Kevin Warsh should tread carefully when trying to rein in the central bank’s balance sheet.

• In Munich at the weekend, ECB president Christine Lagarde announced that Euro swap lines would be available to any country except bad actors on a permanent basis. The move contained an important message about euro stability, but I cannot conceive of a stressed situation in which the ECB would have refused a swap line that had been requested from a trusted partner.

• Staying with the ECB, executive board member Isabel Schnabel made a strong case for smashing multiple regulations across the continent with a 28th regime.

• High inflation is undermining Turkey’s success in producing TV dramas.

One last chart

When someone (most often in the US or UK) next tells you that Eurozone interest rates will always be too high for Mediterranean members and too low for the Nordics, show them this chart.

For decades Spain had a big unemployment problem while Finland’s joblessness rate was close to the best in the Eurozone. No longer. Spain now has a lower unemployment rate than Finland. When they’re feeling resentful, you could forgive the Spanish for thinking the Finns should just get out of the sauna and do some work.

Does this prove the Eurozone to be an optimal currency area? Not really. But it does show that a single interest rate does not prevent fortunes changing significantly between members.

Central Banks is edited by Harvey Nriapia