Two Key Charts The Fed's Watching Today

by: Barry Ritholtz

Let's have a go at some historical charts that might be influencing the FOMC today.

Everyone is pretty much expecting a "No change in Interest Rates (let's parse the statement for minor grammatical changes)" type of day -- to be followed by a series of market moves up and down commencing at 2:15pm. More than a minor deviation from that scenario would be a major surprise.

As we await the inevitable, have a look at these rather informative charts, via economagic:

Payroll Employment 1960-2006
Black line is total NFP; Red lines are year over year change:

nfp

Note the cyclical tendencies of the Business Cycle: During expansions, hiring ramps up rapidly, then plateaus. It begins to fall soon thereafter.

Advocates of the "Soft Landing" should note that in 1966 and 1995, after strong moves up, there was a peak, a move down (year-over-year changes), which quickly stopped and reversed back up.

Also worth noting: in non soft landing years --1969, '73, '79, '89, '99 -- there was a major plateau in hiring on a year over year basis, which then led to a long slide downwards in hiring. This was followed by a recession. (Need I point out the plateau in 2006?)

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Here's a chart going back to 1960 that covers the Fed Funds rate as well as Prime rate (defined as the interest rate charged by banks to their most creditworthy customers). What is particularly noteworthy is that the relative interest rate could be high or low and lead to a subsequent recession. (Changes in Rates relative to Real after inflation rates matter more).

fedfunds

If I get some time this week, I'll do the same thing for wages (which are a bit more challenging to graph).