Jobless Claims Drop More Than Expected, Pointing to More Fed Tightening

A 'Now Hiring' sign hangs near the entrance to a Winn-Dixie Supermarket in Hallandale, Fla., on Sept. 21, 2021. (Joe Raedle/Getty Images)

New weekly filings for unemployment insurance—a proxy for layoffs and a labor market barometer—fell more than expected last week, to a three-week low, with experts saying that the Federal Reserve will likely see this as a sign of labor market tightness and, therefore, will have no reason to pause in its aggressive monetary-tightening cycle.

First-time filings for unemployment insurance fell to 214,000 for the week ended on Oct. 15, the Department of Labor said in a Thursday report (pdf). Economists expected to see 230,000 claims filed, with the reported number coming as a downside surprise and a sign of labor market tightness.

“Jobless claims edge lower while continuing claims rise. Fed likely to see this as another indication of a tight labor market,” noted Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, in a statement.

Faced with inflation running near a 40-year high and outpacing wage gains for many Americans, the Fed has been hiking interest rates at their fastest pace since the 1980s. The Fed’s key policy rate has jumped from near zero in March to a current target range of 3.00–3.25 percent.

But so far, there are few signs that this level of interest rates is doing much to curtail inflation and bring it closer to the Fed’s target of 2 percent.

Another 75 basis-point move up in rates is expected at the conclusion of the Fed’s next policy meeting on Nov. 1–2, with even more tightening in the pipeline as policymakers try to cool demand across the economy and bring the labor market into balance.

Fed Chair Jerome Powell said in September that he was hoping the central bank’s policy moves would bring down the number of job vacancies, which remain far higher than the number of unemployed persons.

The number of job openings in the United States fell by 1.1 million, to just over 10 million, between July and August, while there are around 6 million unemployed. This means the ratio of vacancies to unemployed persons was 1.7:1, a number that the Fed is unlikely to see as low enough.

“The Fed wants to get this [ratio] back to the pre-pandemic 1.2,” SoFI’s Liz Young wrote on Twitter on Oct. 4, the day the most recent job vacancy data were released.

Bringing the labor market into greater balance inevitably means the unemployment rate will have to rise, though Fed officials hope it won’t go too high.

Charles Evans, president of the Federal Reserve Bank of Chicago, said on Wednesday, that it would be “good” if the Fed could bring inflation back to target while keeping the jobless rate under 5 percent.

The U.S. unemployment rate fell to 3.5 percent in September from 3.7 in August, suggesting the Fed’s actions were having little impact on the labor market.