Fed faced with hard choice on weak jobs, high inflation

* February job loss, surge in oil prices raise stagflation concerns

* Fed expected to hold rates steady at March meeting

* Investors bet on June rate cut amid economic uncertainties

By Howard Schneider and Ann Saphir

March 6 (Reuters) - Fresh signs of labor weakness and oil-driven inflation concerns are cornering U.S. Federal Reserve officials into an uncomfortable choice: leave borrowing costs steady to ensure that inflation does not worsen or cut them to shore up a job market that is losing ground. For now, they look poised to wait, even as traders ramped up bets that rate cuts will start in June. That is when President Donald Trump's nominee for Fed chair, former Fed governor Kevin Warsh, is expected to take over from current Fed Chair Jerome Powell as lead policymaker at the U.S. central bank. For Warsh it may be a tough call. As oil prices hit $90 a barrel and U.S. gasoline prices jumped from $3 to $3.32 a gallon in a week, a Labor Department report on Friday showed employers unexpectedly shed jobs in February and the unemployment rate rose to 4.4%. Private-sector employers added fewer than 300,000 in all of 2025, making it the worst year, excluding the 2020 COVID-19 shock, since 2009, the report showed.

"The hopes that the labor market was steadying -- maybe that was too much and we really have to keep our eye on the labor market; but we also have inflation printing above target and oil prices rising," San Francisco Fed President Mary Daly told CNBC. "Both of our goals are risks now, and we need to keep our eye on both."

The February jobs numbers were driven lower by labor strikes in the health sector and the ongoing downsizing of the federal government. But even paired with the stronger January report, the two-month average jobs gain is below the 30,000 Daly estimates the economy needs to keep the unemployment rate steady.

Meanwhile, inflation by the Fed's targeted metric was 2.9% in December and economists expect a report out next week to show it remained there in January.

The Fed aims for 2% inflation, though it has not met that goal for the past five years.

Combined, the dynamics - a war, rising commodity costs and weaker hiring - put the Fed in a "stagflation" vise that policymakers last year had thought they could avoid.

"I remain hopeful-slash-expecting that conditions will improve that will start to see some progress on inflation ... and by the end of this year that we would be in a situation that we could commence our march back down to something like the settling point which is below where we are today," Chicago Fed President Austan Goolsbee told Bloomberg TV, referring to the Fed policy-rate cuts. But he added: "As we get more uncertainties, I kind of think that time at which it makes sense to act keeps getting pushed back."

The Fed is expected to hold rates steady at its upcoming March 17-18 meeting, but may now have a broader discussion looming at a moment when key supply-chain risks are again on the table.

It may seem like a flashback to the pandemic era if the difficulty of supply-chain disruptions in an integrated global economy became apparent, with no predictable timeline for how long the flow of oil may be disrupted or how high the price may go.

The outcome today may now hinge on how policymakers decide to balance the fresh risks to the economy that could now mean both higher prices and weaker growth.

In comments on Bloomberg Television, Fed Governor Christopher Waller said he viewed the rise in oil prices as "more like a one-off event" that would not require a Fed response, but also acknowledged the uncertainty if the Iran conflict persists and oil prices keep rising.

"If it's unwound in ... a couple of weeks or even two months, it's not going to be a big factor down the road," Waller said. "If it becomes more permanent ... Then it'll start bleeding through to other parts of the economy."

But policymakers are also likely to put new weight on the labor market after the disappointing February numbers.

"If the labor market continues to go weak ... If we get a bad number ... the question is 'why are you just sitting on your hands?'" and not trying to bolster the job market with rate cuts, Waller said before the jobs data was released.

Traders priced a June rate cut at about a 51% probability after the jobs data, with another rate cut likely by year-end. (Reporting by Howard Schneider in Washington and Ann Saphir in Berkeley, California; Editing by Deepa Babington and Matthew Lewis)