Jobless Claims Hit Four-Year High, Raising Stakes for Fed Rate Call

Weekly applications for unemployment benefits rose sharply last week to their highest level in four years, delivering fresh evidence of weakening in the U.S. labor market just days before the Federal Reserve is set to decide whether to lower its benchmark interest rate.

Initial claims for the week ending Sept. 6 climbed by 27,000 to 263,000, the Labor Department said, marking the largest number of applicants since the week of Oct. 23, 2021, and the biggest week-to-week increase in almost a year. The report arrived amid a preliminary government revision that suggested job gains for the year through March may be some 911,000 fewer than previously reported.

The Labor Department’s weekly claims figure followed an unexpectedly weak August payrolls report that showed the economy added just 22,000 jobs, well below Wall Street forecasts of roughly 75,000. Economists also noted a sharp rise in layoffs this year, with data showing layoffs up about 140 percent from a year earlier.

The combination of higher initial claims, downward revisions to past job growth and meager recent payroll gains has prompted concerns among forecasters and business leaders that the labor market is deteriorating. Mark Zandi, chief economist at Moody’s Analytics, described the trend as a "labor recession" already under way and warned that further downward revisions or an increase in layoffs could push the broader economy into contraction.

Jamie Dimon, chief executive of JPMorgan Chase, said the economy was "weakening" following the downward revisions to job growth. Federal Reserve Chair Jerome Powell has indicated that the central bank is watching labor-market developments closely and that the health of employment figures will be an important input to the Fed’s decision on whether to reduce interest rates.

Inflation data released this month added complexity to the policy outlook. Consumer prices rose 2.9 percent in August from a year earlier, up 0.2 percentage point from July, a reading that complicates the case for a rate cut. Still, many investors have priced in a 25 basis point reduction at the upcoming Federal Open Market Committee meeting.

"Even though a 25 basis point cut next week seems all but certain, the combination of firmer inflation and weaker labor market data complicates the Fed's picture going forward," said Jake Krimmel, senior economist at Realtor.com. Markets reacted to the swirl of data: the S&P 500 rose 0.8 percent by Thursday afternoon as traders continued to price in an imminent rate cut.

Policymakers face a balancing act under the Fed’s dual mandate to promote maximum employment while keeping inflation near the 2 percent target. A weakening labor market reduces pressure on wages and hiring, which can ease inflationary pressures, but a sharper deterioration in employment risks lowering consumer spending and investment, potentially tipping the economy into recession.

Analysts said the next few weeks will be critical for interpreting the trajectory of employment. The benchmark revision to past job growth, if finalized, would leave the labor market on substantially weaker footing than earlier data suggested, reducing the margin for error for policymakers. Economists emphasized that a sustained rise in layoffs would be a key signal of a deeper downturn, while isolated weekly increases in claims can reflect short-run volatility.

For businesses and households, the evolving data translates into uncertainty over borrowing costs, hiring plans and spending. If the Federal Reserve moves to cut rates, it could ease financing conditions, but the central bank’s next steps will depend on incoming data on jobs, inflation and broader economic activity.

The Labor Department will continue publishing weekly claims, and the Bureau of Labor Statistics is scheduled to release further employment and wage data in coming weeks that policymakers and markets will scrutinize for clues about the strength of the labor market and the appropriate path for interest rates.