zondag 22 september 2013

Federal Funds Rate Vs. Unemployment

The unemployment rate is a key indicator for the Federal Reserve to set the Fed Funds rate. Whenever the unemployment rate goes up, the Federal Reserve will lower interest rates. 

This can be witnessed on Chart 1 which gives the Employment-Population Ratio Vs. the Fed Funds Rate.

Chart 1: Federal Funds Rate Vs. Employment-Population Ratio
Since the economic crisis of 2008, the employment-population ratio has never really recovered, that's why there is very little incentive to ever increase interest rates.

Be advised that we need to look at the employment-population ratio rather than looking at the unemployment rate numbers, as these numbers are subjected to hedonic measures (discouraged workers, part-time workers), which started from 2008 onwards. To show this, look at Chart 2. You will see that since 2008, the correlation didn't apply anymore.

Indeed, the U.S. government has been manipulating the unemployment numbers since 2008 (Chart 3).

Chart 3: Unemployment Rate

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