Why Rising Jobless Claims Could Matter for the Fed

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Claims Wave

Last week, 243,000 Americans applied for first-time unemployment benefits, the highest level since August 2023, according to the U.S. Department of Labor. As the strong U.S. labor market is beginning to cool off, the Federal Reserve will likely keep a close look on indicators like that.

Total number of Americans collecting unemployment benefits in the week ending July 6 stood at 1.87 million, the highest level since November 2021.

The labor market has remained red-hot in recent years, which has played a major part in the Federal Reserve’s decision to hold interest rates at a multi decade high. But as the labor market is turning, and inflation is inching closer to the target, the central bank is getting ready to cut rates.

Difference in Data

What makes weekly jobless claims different from other labor market data points is in the name: They come out every week. This is making them a leading economic indicator that can help suggest the direction in which the economy is going.

At the start of the pandemic, weekly jobless claims arguably became the most watched economic report, because they reflected the effect of lockdowns and their reversals so quickly.  Today, that quick turnaround remains a useful signal to the Fed in its efforts to cool inflation without sending the broader economy into a downturn. 

Most high profile labor data — like the government’s nonfarm payroll report and job openings — lag by a month or more. They always look back at what has happened, rather than what is happening at the moment. 

Slowdown Signals

While jobless claims have certainly edged higher, they’re still broadly in line with a level that may be considered “normal” by economists. At the same time, if data suggests more people are losing their jobs, it would be a very different pair of shoes. Context and timing here are key.

The economy has been adding fewer jobs in the past few months, and the unemployment rate has edged higher. While it’s not immediately cause for concern, it’s telling us that the labor market really is cooling.

For the Fed, this means it’s all about timing. If it waits too long to cut interest rates, the economy could cool too much. If it acts too quickly, inflation could come back with a vengeance.

The FOMC’s next policy decision will be announced on July 31, before the release of the next jobs reports. Markets are pricing in a less than 5% chance of a cut at the meeting, according to CME’s FedWatch tool, but a sharp increase in initial claims leading up to that day could sway those odds. 

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