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Half a Century of Evidence to Fear the Fed

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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The hottest game in financial markets is trying to guess when the Federal Reserve willfinally raise its benchmark interest rate. Fed officials have said that their main concern is over how much slack, or spare capacity, exists in the economy, because workers will become emboldened to ask for higher wages -- and employers will come under pressure to provide them -- only when the slack diminishes. On one measure, the Fed should already be reaching for the rate-rise button.

The Fed funds rate has been held at 0.25 percent since the end of 2008. This week, the central bank repeated its commitment to keep borrowing costs low for a "considerable time." At the same time, it changed its language aboutthe jobs market, saying the "underutilization of labor resources is gradually diminishing." It had previously referred to a "significant underutilization."

QuickTake Forward Guidance

Sean Corrigan, an investment manager at Diapason Commodities in Switzerland, points out that with fewer Americans applying for unemployment benefits than at any time in more than 14 years, there's a mismatch between the Fed holding rates and what's happening in the job market. Consider the following chart, which covers almost half a century of data:

The chart uses the four-week moving average for jobless claims, which smooths out some of the volatility in the time series, and adjusts it for the total population. For the week ending Oct. 24, the number of Americans needing help was 281,000. In a total population of almost 248.5 million, that's a ratio of 0.0012 percent -- 37 percent lower than the average of 0.0019 since the beginning of 1967.

In that same period, the average U.S. unemployment rate has been 6.3 percent, compared with 5.9 percent currently. The average historical Fed funds rate, though, is 5.6 percent (these data begin in 1971):

Now, this doesn't mean the Fed is about to jump into action; the post-crisis economy, in the U.S. and the rest of the world, is arguably more fragile than at any time in the past half-century. But history suggests that monetary policy has gotten so out of sync with the labor market that once the Fed does move, it may tighten further and faster than anyone currently expects.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net