The latest initial jobless claims data shows that the scale of layoffs by U.S. companies remains at a historically low level. At the same time, New York Fed President Williams delivered an in-depth speech on inflation risks, the impact of AI on productivity, and the future of the balance sheet.

The combination of these two factors paints a complex picture of the current US macroeconomic landscape: while the labor market is gradually slowing down due to the lagged effects of tariffs and high interest rates, it remains resilient overall.

With inflation still "too high," the Federal Reserve is viewing the excessive demand driven by AI investment as a potential new inflationary variable, further increasing its reliance on data for policy.

Employment data analysis: While layoffs are at historically low levels, a structural slowdown is becoming a trend.

The latest high-frequency data on the labor market shows that the US job market has shown some resilience in the short term, but the signs of a slowdown in the medium to long term cannot be ignored.

The decline in initial jobless claims highlights companies' reluctance to hire and their restraint. Data from the U.S. Department of Labor shows that for the week ending July 4, initial jobless claims in the U.S. decreased slightly by 2,000 to 215,000, lower than the market expectation of 220,000. The four-week moving average, smoothing out weekly fluctuations, also declined slightly to 218,750. Since emerging from the pandemic recession, this figure has remained stable within a healthy range of 200,000 to 250,000, indicating that while U.S. companies are becoming more cautious in hiring, there has been no panic-driven large-scale layoffs, and the overall employment environment remains stable.

Major companies are frequently optimizing their operations, and the decline in the unemployment rate may be misleading. Behind the seemingly calm initial jobless claims data, a divergence is emerging in the health of the real economy:

Industry giants are taking drastic measures: Recently, many leading companies, including Verizon, UPS, Amazon, Disney, Starbucks and Walmart, have successively launched layoffs, and Microsoft announced this week that it will cut 4,800 jobs in its Xbox gaming business and other sectors.

Cooling hiring intentions and statistical illusions: June's non-farm payrolls increased by only 57,000, less than half of the previous month's figure, directly reflecting the lagged impact of high interest rates, federal government layoffs and restructuring, and tariff policies on business confidence for expansion. Although the unemployment rate fell slightly from 4.3% to 4.2% in June, this was not due to an increase in jobs, but rather because a large number of unemployed people chose to leave the labor market, resulting in a smaller statistical denominator and thus a "numerical improvement."

Williams' speech highlighted that his hawkish stance remains unchanged and that AI is becoming a new variable in inflation.

As the job market presents a delicate balance of "cooling hiring and no layoffs," the frequent statements from the Federal Reserve's "number three" official, New York Fed President Williams, have provided a key reference for the market to understand the subsequent path of monetary policy.

By closely monitoring inflation risks and maintaining a "data-dependent" approach, Williams clearly outlined the Fed's policy bottom line: inflation remains "too high," and the current risks primarily lie in inflation.

He suggested that a 0.2% month-on-month increase in the PCE (Personal Consumption Expenditures Price Index) in the second half of the year would be in line with the inflation target. Considering the current performance of the labor market , he believes that "the labor market is very stable," which also means that the Federal Reserve is not under pressure to cut interest rates urgently to save the market.

If future data indicates that inflation is higher than the benchmark forecast, monetary policy will have to respond (including extending the high-interest-rate cycle or even raising interest rates).

In his first address on the "double-edged sword" effect of AI, Williams discussed the macroeconomic interplay between supply and demand, unusually focusing on the complex impact of artificial intelligence on the macroeconomy and viewing it as a significant new variable in the Federal Reserve's decision-making.

In the long term (supply side): the wider application of AI will boost productivity and bring a “huge positive supply shock” that can curb inflation in the long run.

In the short term (demand side): the current frenzy of AI investment is stimulating huge capital expenditures and upstream demand. If demand growth outpaces supply, the AI boom will become a new factor driving up inflation. He emphasized that the Federal Reserve is discussing this scenario, adding, "If AI continues to stimulate demand, you can't ignore that."

As quantitative tightening (QT) enters its "deep waters," technical tools are providing support. With the continued advancement of QT, Williams frankly admits that he "doesn't know how much further the balance sheet can be reduced."

However, he redefined the boundaries of liquidity: "Adequate reserves are a state of the money market, not a specific number." To prevent a repeat of the 2019 "cash crunch," he called for standing repurchase operations (SRF) to be treated as routine business.

This indicates that the Federal Reserve is cautious about reducing its balance sheet, preferring to use technical tools to precisely control interest rates rather than sticking to a fixed amount of balance sheet reduction.

Summary and Market Implications

By combining Williams' policy logic with the latest initial jobless claims data, we can draw the following three key insights:

The expectation of an interest rate cut is facing a "soft landing" delay. The latest unemployment claims are at a low level, which strongly refutes the narrative that the economy will immediately fall into a deep recession, providing fundamental support for the Federal Reserve to maintain high interest rates.

Given that the labor market has "slowed but not collapsed" and inflation risks remain dominant, the market should not bet prematurely that the Federal Reserve will implement continuous and significant interest rate cuts. "Higher for longer" remains the Fed's current baseline defensive stance.

The capital expenditures of tech giants are becoming a "sweet burden" for macroeconomic inflation control.

Williams' remarks on AI have sounded an alarm for the technology sector and the entire financial market . Previously, the market generally viewed AI investment as a purely growth story, but the Federal Reserve has begun to be wary of the resulting overheating of capital and excessive demand. Tech giants (such as Microsoft and Amazon) are simultaneously optimizing traditional businesses and controlling costs through layoffs, while pouring massive amounts of capital into AI infrastructure. This structural shift (laying off traditional jobs and investing in AI) could potentially extend the Federal Reserve's fight against inflation on a macro level.

Williams' repeated emphasis on "data dependence," coupled with the contradictory characteristics of current employment data (low layoffs and low hiring), means that any high-frequency macroeconomic indicator in the future (such as monthly non-farm payrolls, CPI, and PCE) could trigger violent market fluctuations, and market volatility may be amplified during the "data vacuum period."

With the end of balance sheet reduction unclear and liquidity testing its limits, the operation of technical tools such as standing repurchase agreements (SRFs) will become an important window for observing whether the Federal Reserve will end balance sheet reduction ahead of schedule.