The number of continuing applications for unemployment benefits hit its highest level since November 2021 last week, furthering signs the labor market is cooling as unemployed workers struggle to find new jobs.

New data from the Department of Labor showed nearly 1.84 million claims were filed in the week ending June 22, up from 1.82 million the week prior. Meanwhile, the 4-week moving average of weekly jobless claims ticked higher by 3,000 to 236,000, the highest rate since September 2023.

LPL Financial chief economist Jeffrey Roach reasoned the data is "sending a warning sign that the labor market could be softening."

The key question for the Federal Reserve is whether this softening is yet another sign of normalization in the labor market or an indicator that higher interest rates could seriously harm the US economy.

An increasing number of economists believe that the risks lean toward a painful outcome.

Oxford Economics lead US economist Nancy Vanden Houten cautioned on reading too far into claims data, which can be volatile from week to week, but noted that a further move higher in the trend of weekly jobless claims would undoubtedly be a point of concern.

"A persistent rise in initial claims would signal more weakness in the labor market and a larger rise in the unemployment rate than we currently expect and would add more support to our case for the Fed to start lowering rates in September," Vanden Houten wrote in a note on Thursday.

The Fed has largely remained steadfast in its argument that it must gain "greater confidence" in inflation's path lower before cutting interest rates. In his most recent press conference on June 12, Fed Chair Jerome Powell noted the labor market continues to normalize and, from the Fed's perspective, hasn't shown true signs of concern yet.

"We see gradual cooling — gradual moving toward better balance. We’re monitoring it carefully for signs of...something more than that, but we really don’t see that," Powell said.

But some economists argue the trends in the labor market aren't promising.

"[Taken] together, hiring and firing indicators point to a sub-100K trend in private payrolls growth over the next three months, which would give a further boost to the unemployment rate and leave the Fed looking seriously behind the curve," Pantheon Macroeconomics chief economist Ian Shepherdson wrote in a note to clients on Thursday.

Renaissance Macro head of economics Neil Dutta recently told Yahoo Finance that with inflation falling and the labor market weakening, the Fed should be cutting rates soon.

Investors currently expect the Fed to cut rates twice this year, according to Bloomberg data. Forecasts from the Fed released earlier this month suggested the central bank would cut rates just once this year.

With the job openings rate back to its pre-pandemic rate, Dutta is concerned that any further declines in job openings will come with a rise in unemployment.

"I just don't think the Fed wants to really push the weakening in labor demand that much more," Dutta said.

He added, "It's not like the risk at this point is for the unemployment rate to unexpectedly go down. The most likely distribution of outcomes is that it's stable or it goes higher."

From a markets perspective, this has strategists telling Yahoo Finance they believe the labor market might be the most important economic indicator to watch right now, not inflation.

"The labor market for us is the key to the markets," Cit's head of equity trading strategy Stuart Kaiser told Yahoo Finance.

"Our general view is you want to run long your US equity portfolio unless or until you get a significant slowdown in payrolls."

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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