Economists had expected an increase of 185,000 jobs in January and the jobless rate to reach 3.6%, according to a survey by FactSet Research Systems, a financial data firm.
According to data from the Federal Reserve Bank Of St. Louis, January's jobless rate marked a 54-year low — May 1969 was the last time the unemployment rate was as low as 3.4%.
Job growth in January was "widespread," the bureau said in the report, led by gains in leisure and hospitality, professional and business services, and health care. Employment also increased in government, the report added, "partially reflecting the return of workers from a strike."
In 2022, the average monthly gain in jobs was 401,000, the report indicated.
The Federal Reserve will likely closely examine the January jobs report as it prepares to release their next monetary policy decision on March 22.
As of Friday morning, according to CME Group's FedWatch tool, market participants' pricing of Fed fund futures indicated there is a 94.5% probability that the Fed will increase rates by 25 basis points at the next meeting, and only a 5.5% probability it will hold rates steady.
The Fed's key short-term interest rate is now in a range of between 4.5% to 4.75%, after the central bank raised rates by 25 basis points on Wednesday. At that time, the Fed stated that it "anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time."
Seamus Smyth, New York-based chief developed markets economist at Virtus Investment Partners, said by email that the overall message from this report is "very clearly that the labor market is too strong."
He called the January report "a very substantial upside surprise, especially combined with upward revisions to the prior two months."
"Even with the better data we've been getting on inflation, this strong of a labor market makes it hard for the Fed to pause in (the first quarter)," he said. "The range of outcomes spreads out here as the excess labor market strength increases the chances that the Fed overtightens and sends the economy into recession."
Virtus has $145 billion in assets under management.
Mark Hamilton, chief investment officer of West Conshohocken, Pa.-based Hirtle Callaghan & Co., said by email that "given the annual revisions to surveys in January, we take the optically strong numbers with a handful of salt."
Overall, he noted, the data supports the "Fed's plan to hike rates further over the near term while underlying inflation declines."
The strong jobs data, he added, "reinforces our view that the U.S. economy continues to run above-trend."
Moreover, the Fed can "focus solely on the inflation part of its dual mandate given the strength of the labor market. We have been cautious on duration in fixed income and believe that inflation protection is relatively underpriced and this data supports that positioning."
Hirtle Callaghan has $20 billion in assets under management.