When Will The Unemployment Rate Influence Fed Policy?

Summary

• Reviewing the historical record suggests, unsurprisingly, that higher (lower) rates of unemployment align with a lower (higher) Fed funds rate.
• In the current environment, it’s reasonable to expect that the Fed funds rate will fall and unemployment will rise.
• If unemployment ticks higher in the months ahead, the rise would extend a gradual but conspicuous upside trend over the past two years. In turn, the increase implies that the Fed funds rate will decline.

Luis Alvarez

There are many indicators to monitor for reading the monetary policy tea leaves, each with its own distinctive set of pros and cons. Here’s one more that’s worth pondering: the unemployment rate.

Reviewing the historical record suggests, unsurprisingly, that