WASHINGTON, D.C.: The U.S. labor market continued to outperform expectations in May, with employers adding more jobs than forecast and unemployment remaining steady, reinforcing signs that hiring momentum has strengthened in recent months despite economic uncertainty and rising inflation.

The Labor Department reported that nonfarm payrolls increased by 172,000 jobs last month, well above economists' expectations for an increase of 85,000. Employment gains for March and April were also revised higher by a combined 93,000 jobs.

The unemployment rate held at 4.3 percent for a third straight month.

The latest figures suggest the labor market has regained stability after slowing last year, giving the Federal Reserve greater flexibility to keep interest rates unchanged as it monitors inflation pressures linked to the Middle East conflict.

"This report is likely to confirm to the Fed that the labor market is in a stable place, allowing inflation to be the only focus and driver of Fed policy heading into the June meeting," said Sophia Kearney-Lederman, a senior economist at FHN Financial.

Economists said tax refunds and repayments linked to previously imposed tariffs have helped support consumer spending, softening the economic impact of the U.S.-backed war with Iran. Strong corporate profits have also enabled companies to avoid widespread layoffs, though analysts cautioned that a prolonged conflict could eventually weaken labor market conditions.

Payroll growth exceeded forecasts across a range of industries. March employment gains were revised up to 214,000 jobs, while April's increase was revised to 179,000.

Economists estimate the U.S. economy now needs to generate only between zero and 50,000 jobs per month to keep pace with growth in the working-age population, partly because an immigration crackdown has reduced labor force growth.

The labor market had previously been constrained by uncertainty surrounding broad tariffs introduced by the Trump administration last year. While hiring has improved, economists noted that historically low layoff rates continue to play a major role in supporting overall employment.

Financial markets responded by increasing expectations that the Federal Reserve could raise interest rates later this year. Interest-rate futures implied roughly a 65 percent probability of a rate hike in December, up from 48 percent before the report. The Fed's benchmark rate currently stands in a range of 3.50 percent to 3.75 percent.

The U.S. dollar strengthened against major currencies following the data, while Treasury yields rose. Stocks opened lower as investors reassessed the outlook for interest rates.

Leisure and hospitality led employment gains, adding 70,000 jobs, including 48,000 positions at restaurants and bars. Economists suggested some hiring may be linked to preparations for the FIFA World Cup, which the United States will co-host.

Local governments added 55,000 jobs, while the healthcare sector gained 35,000 positions, primarily in ambulatory services. Employment also increased in social assistance, mining, quarrying, and oil and gas extraction.

Financial activities were a notable weak spot, shedding 22,000 jobs. Employment in the sector has fallen by 107,000 positions since its peak in May 2025, with losses concentrated in insurance and commercial banking.

Annual wage growth slowed to 3.4 percent from 3.6 percent in April.

"There is no compelling reason to expect the Fed to cut rates this year," said Kathy Bostjancic, chief economist at Nationwide. "At this point, it is premature to anticipate a rate increase. For the Fed to consider a rate hike, the jump in energy prices would need to push up prices of other goods and services away from the immediate direct impact and dislodge the so-far well-contained bond market inflation expectations."