US jobless claims fall to 226,000, keeping Fed rate cuts at bay

Initial jobless claims dropped to 226,000 last week, extending a pattern of low layoffs that gives the Federal Reserve room to keep rates higher for longer.

The US labor market showed fresh signs of resilience last week as initial jobless claims fell to 226,000, a level that bolsters the case for the Federal Reserve to hold rates steady through the summer.

"These numbers tell us the economy is still generating enough demand to keep layoffs at historically low levels," said Sarah Miller, chief US economist at Oxford Economics. "The Fed can afford to be patient."

The Labor Department reported Thursday that initial claims for the week ended June 13 declined by 4,000 from the prior week's 230,000, landing just above the 225,000 median estimate in a Bloomberg survey. The four-week moving average, which smooths weekly volatility, rose by 4,000 to 223,250. Continuing claims, a proxy for the number of people still receiving benefits, increased by 24,000 to 1.81 million in the week ended June 6, slightly above analyst expectations.

The data comes as the Fed navigates a dual challenge: a labor market that refuses to soften and an energy price shock triggered by the Iran conflict that threatens to reignite inflation. With May nonfarm payrolls adding 172,000 jobs — beating all economist estimates — investors have increased bets on further rate hikes, pushing rate-sensitive sectors lower. The next Fed decision on July 29 will test whether the central bank can maintain its tightening bias without tipping the economy into a downturn.

The insured unemployment rate held at 1.2 percent, meaning the vast majority of insured workers remain employed. Yet the gradual creep in continuing claims — from 1.795 million in late May to 1.81 million now — bears watching. The last time continuing claims pushed above 1.8 million was in April, when they briefly touched 1.82 million before receding. If the trend persists, it could signal that displaced workers are taking longer to find new positions, a dynamic that historically precedes a broader softening in hiring.

Energy Shock Complicates the Fed's Calculus

The Iran conflict has pushed crude oil prices higher, adding a supply-side cost pressure that the Fed cannot address with rate policy alone. WTI crude traded near $82 a barrel this week, up from $74 before the escalation began in late May. Higher energy costs risk feeding into core inflation measures just as the Fed looks for confirmation that price pressures are sustainably easing. The combination of a resilient labor market and rising energy prices has shifted rate expectations: overnight index swaps now price a lower probability of a September cut than they did before the May jobs report.

What Continuing Claims Signal for the Outlook

The divergence between falling initial claims and rising continuing claims creates an ambiguous picture for policymakers. Initial claims measure new layoffs — and those remain low. Continuing claims measure the duration of unemployment, and their uptick suggests the rehiring process has slowed. The last comparable divergence occurred in the second half of 2024, when continuing claims rose for three consecutive months before the Fed eventually delivered a quarter-point cut in December. If history is any guide, the Fed may need to see continuing claims stabilize or decline before signaling any policy easing.

For investors, the stakes are clear: a labor market that stays this tight through an energy shock keeps rate cuts off the table and raises the bar for risk assets to rally. The 2-year Treasury yield, sensitive to Fed policy expectations, has climbed 8 basis points since the May payrolls report. Until either the jobs data softens or the energy shock abates, the path of least resistance for rates is higher.

This article is for informational purposes only and does not constitute investment advice.