The Fed Needs More Americans to Lose Their Jobs

The number of Americans claiming jobless benefits was lower than expected for the week ending October 14, the U.S. Department of Labor said Thursday, which could prove to be a headache for the Federal Reserve.

Initial unemployment claims declined by 13,000 to 198,000 for the week, the lowest level since January, even as reports of layoffs from the tech sector emerge. The monthly average was down 1,000 jobless insurance applications from the previous week to 205,750 claims.

This came after higher-than-expected hiring in September, when employers added nearly 340,000 jobs, suggesting that the economy was strong and companies were still recruiting to serve consumers who are still spending. Inflation is still high and came in at 3.7 percent for September, unchanged from the month before.

This makes the Fed's meeting at the end of the month complicated as they decide whether to keep rates at the current range of 5.25 to 5.5, the highest it has been in more than two decades.

"The recent strength of the data, including the September reports on employment and retail sales, have raised the odds of another hike at a later meeting and make it more likely that the Fed will start cutting rates later than we expect next year," Nancy Vanden Houten, a lead U.S. economist at Oxford Economics, said in a note shared with Newsweek.

The Federal Reserve is looking to slow the economy to contain inflation that is above its target of 2 percent. A cooling in hiring would indicate that hiking rates to decelerate spending and arrest a rise in prices was working. Yet the economy is still keeping people in their jobs and earning, meaning they are still able to spend.

"The Fed will need to see more softening of labor market conditions to be persuaded that inflation is on a sustainable path back to 2 percent before embarking on rate cuts," Vanden Houten said.

"Conditions in the labor market are playing a key role in Fed policy decisions. Our current forecast is for no additional rate hikes, and we think a hike at the November 1 meeting is unlikely."

However, some believe that the Fed's high rates have hit consumers. On Tuesday, Bank of America CEO Brian Moynihan said he was noticing a softening of spending by customers through the bank.

"The consumer has been slowing down their spending because interest rates take a toll," he said.

A survey last week showed that people feel increasingly pessimistic about their personal finances as concerns over high prices worsen their expectations over where the economy is headed over the next year. Yet, data keeps showing that Americans are still spending, navigating their way around higher prices ahead of the holiday season.

But the strength of the American consumer may come from millions of homeowners who refinanced their mortgages during period of low rates through 2021 and were able to save as a result.

"About 14 million households refinanced their mortgages, reducing their mortgage bill by $30 billion per year through 2021," analysts from the Federal Reserve of New York said Wednesday. The cumulative savings from these lower payments stood at about $120 billion as of the second quarter of 2023.

Economists at the Fed in New York added that homeowners also withdrew large amounts of home equity in the form of cash-out refinances when rates were low. That money amounted to about $280 billion in the second quarter of this year.

The savings may explain why households have demonstrated resilience in the face of economic headwinds, making the job of Fed policymakers harder in their effort to rein in inflation.

The central bank's aggressive rate hikes started in March 2022 and have pushed up borrowing costs for loans, making buying a home unaffordable for many Americans and the purchase of cars more expensive than it has been in years.