WASHINGTON (Reuters) - The number of Americans filing new applications for unemployment benefits increased slightly last week, suggesting the labor market remained stable in March, though the outlook is darkening amid rising trade tensions and deep cuts in government spending.

Despite the low level of layoffs, more people are staying on jobless rolls longer compared to the same period last year, the report from the Labor Department on Thursday showed.

Economists say still-high interest rates and policy uncertainty, especially around import tariffs, are making companies cautious about increasing headcount. 

The Federal Reserve on Wednesday held its benchmark overnight interest rate in the 4.25%-4.50% range, an acknowledgement of the uncertainty swirling around the economy. U.S. central bank policymakers, however, indicated they still anticipated reducing borrowing costs by half a percentage point by the end of this year.  

"The data continue to tell a story of relatively few private-sector layoffs but limited employment opportunities for those who are unemployed," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.

Initial claims for state unemployment benefits rose 2,000 to a seasonally adjusted 223,000 for the week ended March 15. Economists polled by Reuters had forecast 224,000 claims for the latest week. Claims have been bouncing in the middle of the 203,000-242,000 range this year, with layoffs generally staying low and hiring cooling off. 

Fed Chair Jerome Powell told reporters on Wednesday that "conditions in the labor market are broadly in balance." 

A separate program for unemployment compensation for federal employees (UCFE), which is reported with a one-week lag, decreased by 514 to 1,066, despite the mass firings of public workers by President Donald Trump's administration as part of an unprecedented push to shrink the government. 

Labor analysts said the rapid firings led by tech billionaire Elon Musk's Department of Government Efficiency were in some cases being undertaken in ways that made it harder for laid-off workers to file for unemployment benefits.

"But the chaotic nature of the terminations has jerked federal workers through firings, reinstatements, and in-between statuses like 'administrative leave,' meaning many don't show up as fully unemployed yet," said Andrew Stettner, a senior fellow at the Century Foundation. 

The government in court filings this week acknowledged that nearly 25,000 recently hired workers had been fired. 

A judge ruled their terminations were likely illegal, resulting in them being reinstated, though placed on administrative leave at least temporarily.

"Given the government is still developing re-organization plans and reviewing contract spending, claims among federal workers and among private-sector workers in the DC region could go higher soon," said Abiel Reinhart, an economist at JPMorgan.

"There is likely to be some drag on employment in the March payroll report, but the effect so far doesn't look to be dramatic."

Stocks on Wall Street traded higher. The dollar rose against a basket of currencies. U.S. Treasury yields fell.

SLOW BUSINESS FORMATION

Trump's often chaotic tariffs campaign has hurt business sentiment, with economists saying policy volatility was making it harder for companies to plan ahead.

Aggregated credit and debit card data published this week by Bank of America Institute showed a broad moderation in small business spending. It said the shift in sentiment and capital expenditures could slow new business formation and ultimately the small business labor market, the key driver of employment growth.

Separately, a measure of future economic activity fell 0.3% in February after easing 0.2% in January, the Conference Board said on Thursday. Though the Leading Economic Index has been a poor guide, predicting a recession that never happened, economists argued it was worth monitoring, noting that the drop last month was mostly due to deteriorating consumer confidence.

"Without a doubt, the economy started showing signs of a slowdown a while ago and this metric is helpful in reminding investors of the fragility of business conditions," said Jeffrey Roach, chief economist at LPL Financial.

The claims data covered the period during which the government surveyed businesses for the nonfarm payrolls portion of March's employment report. Claims rose moderately between the February and March survey periods. The economy added 151,000 jobs in February, with federal payrolls falling 6,700.

Data next week on the number of people receiving benefits after an initial week of aid, a proxy for hiring, could offer more clarity on the health of the labor market in March.

The so-called continued claims increased 33,000 to a seasonally adjusted 1.892 million during the week ending March 8, not too far from the more than three-year high touched in January, the claims report showed. Continuing claims were around 1.795 million a year ago. 

They increased in Washington, D.C., Maryland and Virginia during the week ending March 8, indicating job losses among federal government contractors and others dependent on government funding.

The Fed on Wednesday projected the unemployment rate would rise to 4.4% this year, revised up from the 4.3% forecast in December.

A separate report from the National Association of Realtors showed sales of previously owned homes unexpectedly rose 4.2% in February to a seasonally adjusted annual rate of 4.26 million units, despite a decline in contracts in the prior two months.

But with consumers increasingly growing anxious about the economy and the labor market, the increase could be temporary. Though mortgage rates have been trending down in recent weeks, they still remain high while house price growth continues.

"Transactions will recover meaningfully only when new mortgage rates get much closer to the average rate of the stock, currently just above 4%," said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. "The Fed's wait-and-see approach to resuming its easing cycle suggests housing market activity will remain very subdued throughout 2025."

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)