Labor Market and Economy Hold Steady as the Fed Signals More Tightening

Matthew Rubin Chief Investment Officer

 

1. Initial jobless claims fell last week and continuing claims held near a three-year low, pointing to limited layoff activity.
2. Minutes from the September Federal Reserve (Fed) meeting showed most policymakers expect one more rate increase by year-end, while views on 2027 remain divided.
3. Manufacturing activity, consumer spending, and payroll growth held up even with the 10-year Treasury yield trading near 5.3% throughout last week.

 

1. Jobless Claims Edge Lower as Labor Market Holds Steady

Initial jobless claims fell to 197,000 last week, below expectations of 200,000.^1,2 Continuing claims, which track the total number of people still receiving unemployment benefits, edged up to 1.72 million, slightly above forecasts and narrowly above the prior week’s three-year low.^1,2 Taken together, the figures show a labor market in which layoffs remain contained, employers are reluctant to cut staff, and unemployed workers are generally finding new positions without extended gaps.

Steady employment conditions matter well beyond the claims data. When households continue earning, they continue spending. Consumer outlays account for roughly two-thirds of economic activity, supporting a broader expansion.³ The Fed also benefits from a steady labor market because solid employment conditions give policymakers greater flexibility to stay focused on inflation, particularly important in light of elevated energy prices.

2. Fed Minutes Point to Further Tightening with a Less Certain Path Ahead

Minutes from the September Fed meeting, released last week, showed that most policymakers believed another increase in the federal funds rate would likely be appropriate before year-end.⁴ That view aligns with the Fed’s September economic projections, in which 16 of 18 officials anticipated at least one additional hike this year.⁵ The picture beyond 2026 is less settled. The median projection implies a hold through 2027, but eight officials projected a higher rate by the end of next year, while the rest predicted rates would be unchanged or lower.⁵ That spread reflects uncertainty about how quickly inflation will return to target.

We expect two additional rate increases over the next year, bringing the federal funds rate to a target range of 4.25%–4.50%. We believe markets are likely to treat these moves as a mid-cycle policy adjustment rather than the start of a prolonged tightening campaign. A gradual, clearly communicated approach may prove less disruptive than the rapid tightening central banks typically use to restrain an overheating economy.

3. Economy Holds Firm in the Face of Higher Borrowing Costs

Elevated bond yields remain in focus, with the 10-year Treasury yield trading near 5.3% throughout last week.⁶ Higher borrowing costs can temper business investment and slow activity, but recent data show continued resilience.

The September ISM Manufacturing PMI edged down to 54.5, comfortably above the 50 level that separates expansion from contraction, a sign the goods-producing sector continues to emerge from a multiyear slowdown.⁷ Manufacturing is a small share of the economy, but its sensitivity to the business cycle makes it a useful barometer, and we read the improvement over recent months as an encouraging signal. Consumer spending also held up through August, with inflation-adjusted household spending rising 0.6% for the month and 2.6% from a year earlier.⁸

Hiring slowed sharply in September, with nonfarm payrolls rising 29,000 and the prior two months revised lower by a combined 60,000.⁹ Nonfarm job gains have still averaged roughly 68,000 per month this year,⁹ a pace that has so far kept the unemployment rate relatively low at 4.2%.⁹ Elevated borrowing costs, tighter monetary policy, and geopolitical uncertainty still pose risks, but the latest data point to an economy on solid footing.

Looking Ahead

1. Consumer Price Index – Wednesday, October 14^th
2. Federal Reserve Beige Book – Wednesday, October 14^th
3. Retail Sales – Thursday, October 15^th

Why It Matters

The coming week will test whether inflation and demand are in alignment with the policy path the Fed sketched out in September. Wednesday’s Consumer Price Index arrives first, and with headline inflation last reported at 3.4% from a year earlier, another firm reading would strengthen the case for one more rate increase before year-end.¹⁰ The Beige Book follows Wednesday afternoon with regional detail on hiring, pricing power, and how businesses are absorbing higher energy and borrowing costs. Retail sales on Thursday will then show whether the consumer resilience seen through August carried into September, after a 1.2% monthly gain in the prior report.¹¹ Together, the three releases should clarify whether demand is cooling enough to lower inflation without unsettling the labor market.

For the period ending 10/9/26.
*Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ U.S. Department of Labor, Employment and Training Administration, Unemployment Insurance Weekly Claims News Release, October 8, 2026
² Reuters, Economists’ Poll on U.S. Weekly Jobless Claims, October 8, 2026
³ U.S. Bureau of Economic Analysis, National Income and Product Accounts, Gross Domestic Product, Second Quarter 2026
⁴ Federal Reserve Board of Governors, Minutes of the Federal Open Market Committee, September 2026
⁵ Federal Reserve Board of Governors, Summary of Economic Projections, September 2026
⁶ U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates, October 2026
⁷ Institute for Supply Management, Manufacturing ISM Report On Business, September 2026
⁸ U.S. Bureau of Economic Analysis, Personal Income and Outlays, August 2026
⁹ U.S. Bureau of Labor Statistics, The Employment Situation, September 2026
¹⁰ U.S. Bureau of Labor Statistics, Consumer Price Index News Release, August 2026
¹¹ U.S. Census Bureau, Advance Monthly Sales for Retail and Food Services, August 2026

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