Key Takeaways

  • U.S. Department of Labor data showed that continuing jobless claims surged more than expected to the highest level since November 2021 in the week ending July 26, consistent with recent signs of a cooling labor market.
  • The number of unemployed workers receiving continuing state benefits during the weekrose by 38,000 to 1.97 million, the Labor Department reported Thursday. The rise in continuing claims indicates greater difficulty for job seekers in finding employment.
  • "The labor market has softened," San Francisco Fed President Mary Dalysaid in a speech Wednesday. "I think additional softening would be unwelcome, especially because we know that once the labor market destabilizes, it often deteriorates rapidly and sharply."

Deep Dive

As the labor market cools, inflation is heating up, posing a challenge for Federal Reserve policymakers, who are mandated by Congress to ensure full employment and price stability.

Consumers expect the annual inflation rate to rise 2.9% over the next five years, 0.3 percentage points higher than the median expectation in June,the New York Fed said Thursday。

Central bank officials closely monitor long-term inflation expectations for any signs of a self-reinforcing upward price spiral.

Recent efforts by Federal Reserve officials to curb inflation to the 2% long-term target have stalled.The Personal Consumption Expenditures Price Indexrose 2.6% year over year in June, up from 2.4% in May, the Bureau of Economic Analysis reported on July 31.

"We need to finish the job," Daly said of the Fed's fight against price pressures. "Inflation is still above our target, which is why rates remain moderately restrictive."

Federal Reserve policymakers noted inflation was "elevated" when they decided on July 30 to hold the benchmark interest rate in the 4.25% to 4.5% range, marking the fifth consecutive meeting with no change.

Two days after the Fed's decision, the Labor Department reported that employers added 73,000 jobs last month, below expectations. Meanwhile, the unemployment rate rose 0.1 percentage point to 4.2%, and data revisions reduced combined job growth for June and May by 258,000.

"This is concerning,"Fed Governor Lisa Cooksaid during a panel discussion Wednesday. "These revisions have some characteristics similar to a turning point."

Another sign of weakness is that service-sector employment fell in July for the fourth time in five months,the Institute for Supply Managementsaid Tuesday.

The cooling labor market and persistent price pressures highlight the risk of stagflation, characterized by high inflation, below-potential economic growth, and high unemployment. Torsten Slok, senior economist at Apollo Global Management, noted that service-sector companies reported paying higher prices last month.

"The sources of this stagflation impulse are tariffs, deportations, and dollar depreciation," Slok said in a client note Thursday.

"This is a problem for the Fed," he said. "Should the Fed focus on rising inflation and raise rates, or focus on slowing growth and cut rates?"