The number of Americans filing new applications for unemployment benefits dropped to its lowest point since 1969 last week, signaling that layoffs remain limited within a largely stable labor market.
Data from the U.S. Department of Labor released on Thursday showed that initial jobless claims for the week ending July 18 totaled 187,000, well below the market forecast of 212,000 and the prior week's revised figure of 208,000. Continuing claims for the week ending July 11 came in at 1.796 million, also lower than the expected 1.807 million and the previous 185,000. The four-week moving average of initial claims for the week ending July 18 stood at 207,500, down from the prior 214,300.
Low initial jobless claims suggest that employers are still reluctant to conduct large-scale layoffs. However, last month's employment report indicated that many Americans have exited the labor force, which could also be a factor contributing to the decline in unemployment filings. After rising in late May and early June, initial claims have since retreated. Most economists view that earlier increase as noise.
Although nonfarm payroll growth slowed significantly in June and April and May figures were revised downward, economists state the labor market has not undergone a substantial change and remains in a state of "slow hiring, slow firing." The relatively steady condition of the U.S. labor market could support the Federal Reserve in holding interest rates steady, but simultaneously, renewed inflation concerns stemming from escalating tensions in the Middle East may push the Fed to maintain a hawkish stance for a longer period.
With the Fed's July policy meeting approaching, policy path uncertainty has notably increased under new Chair John Walsh. Just days before the meeting, significant divergence remains among market participants over whether the Fed will raise rates this month—a scenario that has been relatively rare in recent years. Interest rate swaps show traders currently see about a 30% probability of a 25-basis-point rate hike on July 29 and a 70% chance of no change.
Since taking over as Fed Chair in May, Walsh has repeatedly expressed a desire to abandon the central bank's long-standing practice of providing advance guidance on the rate path through forward guidance. He argues that, in a rapidly changing economic environment, pre-releasing policy signals could limit policymakers' flexibility. For financial markets, this means both the risks and potential rewards of betting on the Fed's policy direction have increased. Investors who make correct calls could see higher returns, while those who err could face larger losses.
Walsh has consistently emphasized that U.S. inflation has remained above the Fed's 2% target since the COVID-19 pandemic. As a result, markets generally expect the Fed to resume rate hikes this year, with the biggest question now being the timing of such action. Compared to traders, economists are more aligned in their views.
A survey found that all 76 economists polled expect the Fed to hold the federal funds rate target range steady at 3.5% to 3.75% during its July 28-29 meeting. Data released last week showing the first monthly decline in the U.S. Consumer Price Index (CPI) in six years had prompted bond markets to bet on the Fed staying on hold.
However, as the U.S.-Iran conflict has escalated again recently, international oil prices have moved higher. Crude prices surged on Friday after Houthi militants, backed by Iran, claimed they attacked two Saudi Arabian oil tankers in the Red Sea. Simultaneous pressure on the Strait of Hormuz and the Bab el-Mandeb strait threatens deeper supply disruptions. Combined with dwindling inventory buffers and rising refining pressures, this is expected to intensify inflationary pressures and strengthen expectations for a rate hike.
Against the backdrop of Middle East instability, several Fed officials expressed stronger concerns about rising prices last week. Dallas Fed President Lorie Logan, an FOMC voter in 2026, became the first Fed official to call for a rate hike, stating that inflation does not appear to be sustainably returning to the Fed's 2% target. Kansas City Fed President Jeff Schmid also said that inflation is his biggest concern, given that price risks could escalate further in the coming months. Despite U.S. inflation data for June beating market expectations, Schmid warned that it is too early to conclude that inflation has begun a downward trend.
Fed Vice Chair Philip Jefferson also stated that if inflation does not cool quickly enough, the Fed should consider raising interest rates. However, he added that the current monetary policy stance is in good shape.
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