Will the rising unemployment rate (U3) force the Fed to cut rates sooner?
The FED's decisions are generally not based on economic variables - which can be proven by the lack of high correlation between the FED rate and the main economic variables, or even various variants of the Taylor rule.
With this in mind, will the rising unemployment rate be too hard to ignore in an election year? Historically, the Fed has been quick to cut interest rates whenever the unemployment rate begins to rise - at least in recent non-inflationary cycles - see Figure 1.
In 2019, the Fed didn't even wait for the unemployment rate to bottom out... see Figure 2.
In 2007, it was enough for the unemployment rate to increase from the bottom of the cycle by only 30 bps and we already had the first cut - see Figure 3. And even at the time of the first cut, the unemployment rate was only 20 bps above the cycle low (in August 2007 U3 was 4.6% ).
In 2001, the first cut occurred with the unemployment rate only 10 bps above the cycle low - see Figure 4.
And what is the situation today? The unemployment rate is already 60 bps above the cycle low (53 bps unrounded - see Figure 5). Since the bottom of the cycle, i.e. from April 2023, the number of unemployed people has increased by 934,000 and the number of people not-in-labor-force has increased by 750,000 in the same period.
If we see a further increase in the unemployment rate in the next 2-3 months, this may be a strong argument for the Fed to lower rates sooner rather than later...
Table 1 presents key data series from the US labor market. Table 2 is the same data, but it exhibits monthly changes. The last row of Table 2 shows the cumulative change since the cycle low (since the U3 trough in April 2023). And so during this period:
Population +1,805,000
Labor Force +1,054,000
Unemployed +934,000
Employed +121,000 (only!)
Not in labor force +750,000
Table 3 shows, among other things, the calculation of the unemployment rate.
