Rising U.S. jobless claims heighten pressure on Fed to cut rates

U.S. weekly initial unemployment claims climbed by 27,000 to 263,000 last week, the highest level since October 2021, increasing pressure on Federal Reserve Chair Jerome Powell to loosen monetary policy amid signs of a cooling labour market.

The rise in claims coincided with data showing U.S. inflation picked up in August to an annual rate of 2.9 percent, the highest reading since January, a combination that has revived concerns about slowing growth alongside persistent price pressures. Financial markets responded by betting on near-term policy easing: investors priced in a quarter-percentage-point Fed rate cut at the central bank’s meeting next Wednesday and further reductions before year-end.

Wall Street indices moved higher, rallying toward record levels as traders cheered the prospect of lower borrowing costs. The 10-year Treasury yield fell below 4 percent for the first time since market turbulence in April, a move traders and analysts linked in part to tariff-related uncertainty tied to administration trade policy.

Analysts said the labour-market deterioration is shifting the Fed’s calculus. "The weakening labour market is a warning light. However, right now, investors are taking a glass-half-full approach, enthused by the prospect of lower borrowing costs," said Susannah Streeter of Hargreaves Lansdown. James Knightley of ING Bank added, "The weakening of the jobs market is now the Fed’s priority, with rising jobless claims hinting at a pick-up in lay-offs at a time when hiring is subdued."

The data arrive against a backdrop of official revisions to payroll figures that have complicated the employment picture. The U.S. government this week said job numbers may have been overstated by about 911,000 in the year to March and released revised figures showing employment fell in June by 13,000. Those adjustments have raised questions about the underlying strength of labour-market gains reported earlier in the year.

President Donald Trump has publicly criticised the Fed’s pace of easing, at one point calling Powell a "numbskull" for not moving faster to lower rates. Market moves since April, when tariff-related volatility unsettled bond markets, have been closely linked to expectations about both trade policy and central-bank action.

Economists warned that the combination of slowing hiring and still-elevated inflation could increase the risk of stagflation, a scenario of stagnant growth with rising prices that complicates policy decisions. For the Fed, the competing signals—an uptick in inflation and a softening labour market—present a difficult trade-off between supporting employment and keeping inflation expectations anchored.

Traders have accelerated the timeline for rate cuts after the jobless claims report, though Fed officials have repeatedly emphasised data dependence. Market pricing currently reflects a first easing followed by additional cuts through the remainder of the year, but the path remains contingent on incoming economic readings and labour-market fundamentals.

Chris Beauchamp of IG said the market-driven expectations may offer the Fed some political cover. "Perhaps Powell will be privately glad that he has such cover, since it helps allay concerns that the Fed has buckled under White House pressure," Beauchamp said.

Investors and policymakers will closely watch forthcoming labour-market releases and inflation measures for clearer signals on whether the recent deterioration in claims represents a lasting trend. The Fed’s decision next Wednesday will be reviewed in the context of these evolving data and revised employment statistics that have already altered perceptions of the economy’s near-term trajectory.