Market May Be ‘Ahead of Itself’ With Fed Forecast: Chart of Day
Investors and most economists are forecasting the U.S. Federal Reserve will increase rates sooner than history would suggest.
After the past two U.S. recessions, the Fed didn’t start raising policy rates until joblessness had fallen about three- quarters of the way back to the full-employment level, the CHART OF THE DAY shows. To satisfy that requirement, the jobless rate would need to be 6.5 percent, compared with today’s 9 percent.
“If we let history determine when the Fed will raise interest rates, then the market consensus may be a little ahead of itself,” said Rudy Narvas, a New York-based senior economist at Societe Generale. Narvas expects the Fed won’t raise rates until the end of 2012.
In the 1990-91 recession, the unemployment rate rose 1.6 percentage points over the Congressional Budget Office’s estimate of full employment. The Fed began to increase interest rates when the rate retraced about three-quarters of the increase. The same pattern held after the 2003 peak in unemployment.
The U.S. jobless rate and the CBO’s estimate of its full- employment level were both about 4.9 percent in the first quarter of 2008. Unemployment rose 5.2 percentage points since then, peaking at 10.1 percent in October 2009. Economists forecast 8.6 percent unemployment by the end of the first quarter of 2012, which is when investors expect the Fed will begin increasing policy rates, based on data from the Fed Funds futures contract.
To contact the reporter on this story: Ilan Kolet in Ottawa at ikolet@bloomberg.net.
To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; Marco Babic at mbabic@bloomberg.net
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