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US Jobless Claims Hit 1.5-Year Highs, Fed May Delay Rate Hikes

The weekly data from the US Labor Department published on Thursday showed that the number of Americans receiving jobless benefits has hit 1-½ year highs. The initial claims for unemployment insurance increased by 22,000 during the week ending May 6, reaching 264,000. This figure is the highest since October 2021, and it was higher than the economists’ forecast of around 245,000 total claims for the same period.

The data on jobless benefits comes as the US economy is grappling with the challenge of inflation. The Federal Reserve has identified robust job and wage growth as two critical drivers of inflation. The Fed has a mandate to ensure “maximum employment” through a jobless rate of 4% or below, and keeping inflation “manageable.” Since mid-2021, the pandemic and the trillions of dollars of relief spending by the government have triggered runaway inflation, making it difficult for the central bank to achieve its mandate.

The weaker labor picture, as indicated by the jobless benefit data, coincided with separate data from the Labor Department, which showed that producer prices, or what wholesalers of merchandise charge retailers, posted a smaller-than-expected growth in April. The so-called Producer Price Index (PPI) posted a year-on-year growth of 2.3% in April, versus a 2.7% gain in March. This was the lowest annual growth in the PPI since January 2021.

Economist Greg Michalowski, commenting on the ForexLive forum, noted that the recent data on jobless claims is starting to support weaker employment. He added that the unemployment data, along with weaker PPI, supports a Fed that is likely to keep rates unchanged. The central bank has raised rates by 10 times since the end of the coronavirus pandemic in March 2022, adding a total of 5% to the previous 0.25%.

After its last rate hike, the Fed said it will “closely monitor” data in the coming months and assess their effectiveness in helping the United States return to its inflation target of 2%. This has given hope to the central bank’s watchers that the Fed could call for a pause at its next decision on rates on June 14. However, the recent data on jobless claims and PPI may increase the likelihood that the Fed will hold off on interest rate hikes in June as the central bank advances in its fight against inflation.

Earlier, the White House Council of Economic Advisers released a report warning of the dire economic consequences that could result from a default on U.S. payment obligations. The report suggests that a protracted default could cause the loss of 8.3 million jobs and a 6.1% reduction in economic output, which would have devastating consequences for the economy.

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