Are U.S. and World Unemployment Sending a Signal to the Fed?

Posted by Bryan Taylor in Economic Data, Government with no response yet

The Unemployment Rate in the United States is of primary concern not only because it is an important measure of labor markets, but because it influences the Fed’s decision on whether to raise the Fed Funds Target, which has remained near zero since the beginning of the Great Recession.  Although the Fed is hesitant to raise interest rates because of the impact it has on the economy, the graph below shows that 2014 provided a crucial development for the U.S. economy from a technical point of view. 

Between 2009 and 2013, the United States Unemployment Rate (U-3) was above the average Unemployment Rate for the World, as calculated by the World Bank.  This was an important change because between 1987 and 2009, the Unemployment Rate in the United States was below the global average, with the exception of a period in 1991 and 1992 when the US rate was slightly higher than the global average. For this reason, the Fed was well justified in keeping interest rates low to fight unemployment and foster growth.

                Things changed in 2014. While the World Unemployment Rate continued to decline in 2014, falling marginally from 6.7% to 6.5%, the US Unemployment Rate plummeted from 6.7% to 5.6%.  The March 2015 measure for the U.S. Unemployment Rate was at 5.5%. In 2014, the U.S. Unemployment Rate went from being equal to the World Unemployment Rate to being significantly below it.

                Given the fact that this graph covers almost 30 years of data for World and U.S. Unemployment, it seems unlikely the U.S. Unemployment Rate will rise above the Global Average for years to come.  The combination of a declining World Unemployment Rate, a declining U.S. Unemployment Rate, and the fact that the U.S. Unemployment Rate is below the World Unemployment Rate makes you wonder what signal the Fed is waiting on to raise interest rates.

                In every period in the past where the United States Unemployment rate was declining and below the World Unemployment Rate, the Fed raised the Fed Funds Target Rate in order to reduce the inflationary pressure on wages.  Several major chains, such as Walmart and McDonalds have recently advertised that they plan on raising the wages of their employees. Although falling oil prices and a stronger dollar kept inflation low in 2014, these two factors are unlikely to continue through 2015. Given all this, could 2015 could be the year in which the Fed finally raises interest rates?

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